00:00they measured 60 times cut once the cut
00:03didn't go well and some were like oh
00:06 do I measure 60 more like
00:11what all right this is Dalton plus
00:13Michael and today we're going to talk
00:14about why Founders shouldn't think like
00:19VCS shocking I I would have never
00:21imagined we had this
00:23opinion so maybe we should start what is
00:26thinking like a VC how does a VC how are
00:29they trained to think so let's break
00:30this down and I think to start with when
00:32we say VC we don't literally just mean
00:34venture capitalist this should include
00:37management Consultants yes Banker
00:40Investment Banking people that work at
00:42hedge funds people that work in private
00:44Equity there's a whole host of jobs um
00:48and the people in these jobs they train
00:50you to do a lot of Market sizing to
00:55PowerPoints yes right I mean that's a
00:57job um to analyze fundraising Trends to
01:00do market analysis to read surveys about
01:04the market yes um again experts you guys
01:07talk tot networks um you pay a lot of
01:11attention to the stock market uh Market
01:14multiples other things happening in the
01:16m&a market it's it's an entire framework
01:19of thinking um of small companies as if
01:23they were big companies and using these
01:25large company metrics and Analysis to
01:28apply to them and to be clear for this
01:30video if you're in those Industries this
01:33is a great way to think we in no way are
01:35suggesting yeah these are great tools if
01:37you're job is to be an investment banker
01:39you should think like an investment
01:40banker yeah right Public Market investor
01:42should think like a public market
01:43investor right on yes however what we
01:46have noticed is that this type of
01:48thinking either because these Founders
01:50have worked in these industries or been
01:51exposed to these thoughts yes bring this
01:54framework to getting their first startup
01:57idea and trying to get a first customer
01:59right yes and this is a problem I think
02:01that um we see over and over again
02:06where it's almost like to us twisted
02:09like you start having conversation with
02:10the founder and you'll actually feel
02:12like you're talking to an investor to a
02:15VC and you're like but what about your
02:18passion like what what's your opinion
02:20like what do you care about and it's all
02:22kind of like contrived almost you could
02:24have extracted it from Twitter yeah and
02:27and it's confusing it's like I didn't
02:29hear any of your opinions I don't think
02:31and we've just been talking for 20
02:33minutes now an an example that I notic a
02:36lot in a YC interview
02:39is they want to present a PowerPoint
02:43deck or a slide deck yeah and the way
02:45they describe the company is the way you
02:48would describe a very large company yes
02:50but then when you're like well do you
02:51have any customers no and so they have
02:5415 slides or they want to spend a lot of
02:56time talking about the market
02:57opportunity but there's actually nothing
03:00whatsoever in terms of traction
03:01competitive analysis great competitive
03:06so everyone listening is got to ask well
03:09aren't we VCS y right like isn't this
03:12how a YC partner would think when
03:15reading application conducting
03:16interviews I think that's an excellent
03:18point here's the facts when we are
03:21reading applications and doing
03:22interviews we are investing very very
03:25very early and we've been trained on
03:28what matters and what doesn't matter and
03:30so let's be real what matters is does
03:33your idea make any sense yeah any sense
03:37do you know anything about it yes do you
03:40have the tech skills to build the thing
03:42or anything anything basically and can
03:45you get any customers yes it's almost
03:48it's so basic it shocks people what we
03:51are looking for is very basic stuff well
03:55and I think what's interesting is that
03:56when we try to be smarter we make
03:59mistakes correct when we try to be smart
04:02about markets or when we try to be smart
04:04about comps we make mistakes because one
04:07we haven't studied those markets closely
04:09and two because startups change they
04:11pivot they find new opportunities
04:13technology changes time changes well
04:16think about it when we make an
04:17investment often it does not become a
04:19big company for at least 10 years and so
04:23if you're trying to to do market
04:25analysis and market trends for an
04:26investment that won't become big for a
04:28decade later it's kind of flawed
04:30analysis versus if you're doing analysis
04:32of you know new IPOs coming yeah you're
04:37you're much closer to that coming to
04:38Market and so I'm just arguing this is
04:41completely valid analysis but that is
04:43not useful yes when applied to a startup
04:48with no customers with no product that's
04:49not even sure what the what they should
04:51be working on no these Frameworks are
04:53not necessarily helpful they're not the
04:55most helpful so why do founders do this
05:00like what's going on in a Founder's head
05:02that gets them to think this is how I
05:04should assess an opportunity this is how
05:06I should figure out whether I work on
05:07this idea or not yep is using these
05:10tools what's changed why is this far
05:12more common now well something I noticed
05:15um when we were Founders is there wasn't
05:19access into the mind of investors very
05:21much no um a lot of their appeal was how
05:24elusive they were like behind closed
05:27doors you had to be special get access
05:30to them and and so a funny thing that
05:31has happened is there's now so much
05:33content marketing from investors again
05:35not neily bad and again we are
05:36acknowledging this is a form of
05:38marketing of course of course yeah um
05:41but you now hear a lot more about market
05:43analysis and Market opportunities in
05:45addition there's all of these things for
05:47college students in post College of
05:49programs yes startup classes startup
05:52classes and they tend to be taught by
05:55non-founders they tend to be taught by
05:56investors and a lot of what you learn is
05:59about how to pitch how to do market
06:01analysis how to identify ideas via
06:03market trends what's a good idea right
06:07and so if you go to classes at your
06:09University or you know wherever you're
06:12encountering this stuff if the folks you
06:14should ask yourself if the folks
06:16teaching this have not had much actual
06:19startup experience where they were the
06:20founder who had to do the zero to one
06:23yeah you might you know most likely this
06:25is coming this is a VC mentality bit of
06:28advice right they're probably teaching
06:29you how to be an investor which is not
06:32you know Fair yeah like you know
06:36probably those tools are useful in some
06:38in some respect but maybe not for being
06:40a Founder I also think though that
06:42there's another way I see a lot of
06:43Founders attacking this a lot of
06:45Founders just think this way from first
06:48principles good VCS pick good companies
06:52and can predict the future yep if I can
06:55Model A good VC in my head I will pick a
06:57good idea and increase the likely Ood of
07:00winning and it's interesting to me
07:01because I think that like this is
07:04sometimes what I hate about first
07:05principal arguments is that like sure if
07:09way it makes sense do you think that's
07:12what good VCS really
07:16do yeah I mean I I think look to be
07:19really Direct on that what do I think
07:21great investors do especially later
07:23stage than what Y combinator is yes it's
07:25they find companies that have product
07:27Market fit that are taking off that have
07:30incredible traction and they try to find
07:33them and invest in them and that's the
07:34job just like in a lot of these other
07:36m&a all these other types of finance
07:38jobs it's usually you find the thing
07:41that's making lots of money that's doing
07:42really well and then you glom onto it
07:46and attach yourself to it and the skill
07:49is often getting the thing taking off to
07:51take your money versus someone else's
07:53money not picking amongst things that
07:57haven't launched yet and having Fe about
08:00why one's going to do better than the
08:04unfortunately um when people are doing
08:07that other type of investing investing
08:12like um I worry that there isn't a lot
08:15Founders can learn like from investors
08:19in that early stage investing and even
08:21once you take off there's less to learn
08:23admitting that once you're once you have
08:25a hockey stick tons to learn from that
08:27but if you're like I don't know what
08:29idea to work on exactly exactly that's a
08:32few steps ahead of where you exactly and
08:35most investors are not even really
08:36engaging with companies at that stage so
08:39like ah there there are fewer tools
08:41there I think there's another thing
08:42going on too which is fear-based right
08:44like I know that if I choose a bad de
08:47I'm going to waste a lot of time yeah
08:49shouldn't I do all of this analysis
08:50first to make sure I don't Cho to make
08:52sure I don't choose a bad idea right
08:55yeah we see this a lot where there's
08:57companies that find real problems and
09:00some of their experts end but they are
09:03facing cripp Lan anxiety that it's not
09:05Venture scale yes again they might be
09:08right but they're so obsessed with this
09:10way of thinking that oh what if this
09:12tops out at 50 million
09:14ARR gee yeah can't I'm just not even
09:17gonna start a company I'm gonna stay
09:19doing you know I'm gonna stay at my job
09:20because the IDE I have will Top out at
09:2250 million in Revenue
09:26yeah I I Think It's tricky because I
09:28think that we have to admit in the
09:30startup game you're going after like a
09:32high risk low information and high
09:35commitment bet and there aren't moves to
09:40change those core things right like yeah
09:42you can invest on the margin but it's
09:44still going to be high risk High
09:45commitment and a long-term bat yep and
09:48so I think we would argue it's better to
09:51kind of focus on areas of your strength
09:53areas that you know well like that's
09:55where you can problems that you know a
09:57lot about that you personally observed
09:59maybe you've solved even on a small
10:01scale as opposed to like let me get the
10:03VC toolbox out to try to judge which
10:05idea is good I think the last thing that
10:08I see a lot is that when you think like
10:11a VC it is easier to get positive
10:13feedback from VCS you know when you talk
10:16when you pick an idea because it's the
10:17hot thing on Twitter it's easier to get
10:20meetings yep when you talk about
10:23companies using VC language when you
10:25show some Market slide that says this
10:27Market is right like
10:30investors are responding to that and I
10:31think that's confusing to Founders
10:34because I mean investors can respond to
10:36things that aren't good yes in fact
10:39wouldn't we say that's most of what they
10:41respond like that's our job is like most
10:44investors bet on things that don't work
10:45yeah I mean that is the job yeah and and
10:48again one way to detect this is that you
10:51spend all your time paying attention to
10:52fundraising Trends and the way you come
10:54up with the startup idea is to read what
10:56is raising money and then the thing that
11:00is raising the most money yeah and
11:02that's the algorithm and then maybe
11:05raise some money and then then what yeah
11:07like that's that is an algorithm we see
11:08a lot from this type of thinking which
11:10is all of these companies raise money
11:13I'm going to do it too and we're just
11:15suggesting we've seen that not go well a
11:17lot of the time I think uh this brings
11:20up the next topic perfectly so like all
11:22right I uh what happens when founders
11:25think like BCS and then encounter the
11:27real world yep so you did your analysis
11:30you've done your validation there's a
11:33big Market opportunity it's on Trend VC
11:35is going to like it I'm all lined up but
11:38now I got to get my first
11:42oh what's the what's the VC investor
11:45toolbox for getting customer
11:49one this is it's very humbly again if we
11:52were to if we were to start a startup we
11:54know like the first thing I would admit
11:56is that no matter what I know from
11:59investing in startups that does not mean
12:01getting first customers is going to be
12:02easy for me or for Michael or for anyone
12:05it is freaking hard yep and this zero to
12:08one is always the Trap it's the bear
12:12trap that people run into yeah that
12:14they're like they're already focused on
12:15scaling the company and raising money um
12:19and they're like kind of like glossing
12:21over or being handwavy on how hard it is
12:23to get first customers like yeah we're
12:24going to build our first version we're
12:25going to launch it and then we're going
12:26to be growing and then you know and then
12:28they launch it and it doesn't go well
12:30and people are just shocked it's funny
12:33it's like they measured 60 times cut
12:36once the cut didn't go well and some
12:39were like oh do I measure 60 more
12:42time like what I do this is the this is
12:45one of the reasons we usually advise to
12:46launch quickly is so you get this hard
12:49medicine quickly yeah that your first
12:51launch is probably not going to work and
12:54no one's going to want your thing yeah
12:55right I think we also see when founders
12:59some will kind of engage in the 0 to1
13:01and kind of fail and like live in that
13:03zone I see a lot not even engaging in
13:06the 0 to1 like you know they're hiring a
13:09bunch of people getting an office like
13:12they almost forget they have to get the
13:14first customer and they start gearing up
13:16for customer 100 well but it's because
13:18if your marketing analysis is perfect
13:20it's impossible that the customers won't
13:22want it right a foregone concl the first
13:24customer is a forone what's the real
13:27problem is how do we scale yeah
13:29I'm much more worried about that yes
13:31yeah so I think it's funny you described
13:34it I like this analogy like the the
13:36Starcraft analogy what's the yeah it's
13:38kind of like we've all played real-time
13:39strategy games like Starcraft or or what
13:41have you and when you're playing one of
13:43those games you're just like okay need
13:45more pylons okay cool let's let's build
13:47some Siege tanks over here you're
13:48basically playing a video game it's just
13:51a you've got to scale the thing up as
13:53quickly as possible there's not like a
13:55version of Starcraft where you know you
13:58try to build the base and it doesn't
14:00work or like your units all just like
14:03die or something I don't know like it's
14:04that it's a different game and so I
14:06think people are playing this like ramp
14:07up scale game yeah and they feel like
14:10they're playing a video game and again
14:12they're completely shocked how hard it
14:15is to get it off the ground it is really
14:17different than what people expect yeah
14:19it's funny when I was playing Starcraft
14:21way back in the day like people always
14:24talk about macro versus micro and I feel
14:26as though investors love macro macro you
14:28can you want an Excel spreadsheet yeah
14:30what's your build order like what's your
14:32Tech Tree da and I remember like you can
14:35macro like a and then when
14:39you have three guys versus The Other
14:40Guys three guys and they're better at
14:42micro than you you just lose like you
14:44just it's just like you just lose and
14:47like I would have friends who are so
14:48good at Starcraft like they would just
14:50play me crippled and still destroy me
14:55and it works the same way here right
14:57like and I think that's a great point
14:59we're if you engage with this metaphor
15:01we're talking about micro you've got to
15:02be great at micro to get something off
15:04the ground great and yes no amount of
15:07macro experience helps you be good at
15:09micro I think you start being great at
15:11micro to earn the privilege of doing
15:14macro at all and then how many CEOs do
15:17we find who still serm on the road
15:20they're like oh crap I got to get into
15:21that product because it's something's
15:23broken I got to go six levels down and
15:25fix something cuz like well I would
15:27compare it to you know I think a lot of
15:29people would love to be Ryan from
15:30flexport where he was buying a 747 he's
15:33buying Jets yeah and like moving stuff
15:36all over the world Y and what he's
15:39worrying on worrying about now is micro
15:41micro right like some things changed in
15:43the market and now he's extremely
15:47worried about micro and his company and
15:49that's what makes him great is he can
15:50shift between those two things yes and
15:51when he gets down to micro he can get
15:53some real stuff so what's the cure
15:55Dalton I am a Founder I admit I'm
15:58thinking a VC and I don't want to what
16:01is the cure I think to start with this
16:05of being good at in learning certain
16:08things that may not serve you at a at a
16:10certain time again let me give you an
16:11example let's say that someone worked at
16:13a big company for a while and learned a
16:17politics okay file that away in the
16:20memory bank sure maybe someday that will
16:23be helpful yeah but like forget it prot
16:26like whatever part of your brain was
16:27saving that turn off the those neurons
16:30if you're trying to do a very early
16:31stage startup I would argue this is a
16:33similar thing which is all you know all
16:36the Excel spreadsheet modeling you learn
16:38as an investment banker that's great
16:40just turn that off though like unlearn
16:42that doesn't serve you now NOP and and
16:45embrace the beginner's mind yeah um to
16:48get your startup off the ground yes and
16:50then if you're very successful you'll
16:51use these skills again they just exactly
16:53you earn the right you'll earn the right
16:55to use exactly yeah no I also think
16:59turn off the pollution like whatever the
17:03sources of knowledge they like you know
17:06diagnose why you started thinking this
17:08way and if that means like unfollowing
17:10some people on Twitter or not reading
17:13certain Publications like to do it we're
17:16susceptible to the inputs that come to
17:18our mind and like the easiest way we do
17:19this is turn that media off I also think
17:23spending time with your users is a cure
17:26for this because your users don't care
17:29no if you're if you're solving a problem
17:31for some industry they probably don't
17:34care about the fundraising announcements
17:36nope in AI land again let me let me give
17:38a concrete example there's lots of
17:39people applying to YC with co-pilot for
17:42X ideas you know Co we're going to do
17:43co-pilot for Trucking yeah and they'll
17:47and then the mark they'll be like we did
17:48market analysis AI is really big and
17:50it's growing really fast oh Trucking
17:52really big and trucking is really big
17:53and growing fast and so what we're going
17:54to do is build AI for Trucking yeah fund
18:00yes and then and then it's like okay
18:02well what exactly what is that be
18:05specific what exactly are you going to
18:07build for AI for Trucking
18:09yeah well we'll talk let me get back to
18:11you to that we'll talk to the trucking
18:13companies and figure out what they yeah
18:15it's like the asking the founder of the
18:19precise exact thing they're going to
18:21build they hadn't thought that far ahead
18:23they it's combining Ai and trucking
18:26seems like something that will raise
18:27money and seems like a idea and seems on
18:30Trend and the details feel like
18:33irrelevant details and sometimes people
18:35get frustrated when we ask these
18:36questions they feel like why are you
18:39questions what does it what precisely
18:42does our AI Trucking startup do exactly
18:44yeah shouldn't we go back to competitive
18:48analysis and and but basically land grab
18:51if you spend time a ton of time with
18:54trucking companies yeah you are likely
18:57to have a whole different perspective
18:59here on how AI could solve problems in
19:01trucking but you have to go really deep
19:03and spend time with them versus sitting
19:05you know in your apartment reading
19:06market analysis you know this is
19:08something I see with YC Founders I just
19:09talked to a former YC founder literally
19:12yesterday who he admitted his first two
19:16or three companies were kind of this
19:19things he thought were good ideas and
19:21during that whole time one of the things
19:23he did was he owned a a used auto dealer
19:26um and his latest idea has to do with
19:31giving people auto loans at used car
19:34lots and hearing him talk about it I'm
19:37like you know this almost as well as if
19:39you've owned a used car for the last 15
19:42years like and he could go Point by
19:44point on why the people before didn't
19:47work what the motivations it turns out
19:50like for a lot of these financing
19:51companies the carlot makes more money
19:54selling getting the referral fee on
19:56finance and so like a lot of the a
19:59direct consumer oh I come in with my
20:00loan preapproved the guy in the car lot
20:03is trying to convince you to take a
20:04different yeah that's that doesn't help
20:06it doesn't help so it's like all this
20:08crap that you wouldn't know if you
20:10didn't run a freaking car lot and you
20:13know he's gotten ideas in the space I
20:14don't want to you know I won't say what
20:16he's actually going to do but it's just
20:18so refreshing to hear someone whereas I
20:21think an investor would say with an
20:23investor be like oh this is like an this
20:26space doesn't work like oh like oh
20:29people have tried and and like when you
20:33weeds it's a cool idea so anyways I
20:38um if you can resist this thinking like
20:42BC I think what I've realized is you
20:45kind of have superpowers I think this
20:47virus has invaded a fairly large
20:50percentage Founders yes and so you
20:54actually get to do things other Founders
20:56would think would be silly yeah there
20:58it's like everyone has a filter for what
21:00seems like a good idea or not and if
21:02your filter is exactly the same as
21:03everyone else's you're all going to be
21:05screening out the same ideas right but
21:07if your filter is calibrated differently
21:09you will see things that other people
21:11have decided as bad right well I think
21:15that's what's so funny is because that's
21:16the every successful YC story that's the
21:20story in hindsight right it's like
21:22everyone thought the idea sucked it was
21:24off Trend because it was off Trend it
21:26was a bad model yeah a bad space the
21:29market wasn't big enough whatever and lo
21:31and behold 10 years later our predictive
21:33powers of the investment Community
21:35aren't very good so anyways I think that
21:38if you don't fall for this trap you get
21:40superpowers but you fall and and I think
21:42there's one more really important point
21:44I want to make on this which is we're
21:46trained to want to have the entire plan
21:51worked out yes and remember this is
21:53something that sometimes Founders do is
21:55they're like they'll put a slide in
21:57their slide deck of exit strategy like
21:59basically when they're trying to choose
22:01what idea to work on yeah they're they
22:03include but we know he's going to buy us
22:06who what that they're going to sell the
22:08company and for how much into who and of
22:10course delete that site like oh my God
22:13like are you kidding me yes and and the
22:15point I'm trying to make here is if you
22:16think like an investment banker you do
22:18need to think about an exit strategy if
22:20you're a private Equity company you're
22:21buying a mattress company for hundreds
22:23of million dollars you definitely want
22:24to have an exit strategy slide yes and
22:26to me the Evergreen lesson here
22:29is that you don't need all of the full
22:31plan today and a lot of Founders are
22:33worried what if I do this idea I'm
22:34really confident people want it but I'm
22:36going to top out at $20 million of
22:37annual revenue it's a bad idea then
22:39right and it's so rare you can attest to
22:42this Michael it's so rare in this job
22:43where we see a company that gets to 20
22:46million 30 million 40 million in annual
22:48revenue and the founder has no idea on
22:51how to grow it yeah there's no there's
22:52no move they're out of
22:54ideas I'm not going to say that never
22:56happens but it's extremely rare I think
22:58it's a problem you want to have among
23:00all the problems if you could choose one
23:01and so if you're filtering out ideas
23:04that you that seem great and you have
23:06expertise in it but you're worried it'll
23:07only get to 50 million or whatever yeah
23:10don't you don't need the full plan today
23:13it's okay to not worry about some of
23:16these problems until your later stage
23:17you know personally like did on this
23:19front I remember I got the course book
23:21for University and I remember reading it
23:24and thinking okay I know the 36 classes
23:27I'm going to take before going to school
23:30I was like well I mean the book's here
23:31you read it you pick the classes and I
23:34remember you know halfway through the
23:36first semester being like well that was
23:38a bunch of wasted work yeah and I I I I
23:41wish sometimes Founders would embrace
23:43it's going to be a bit of an adventure
23:45yeah it's going to be a bit of an
23:47adventure anyways good chat dalon sounds
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