# Dalton & Michael: Why investors can’t fix your company

**Author:** Dalton Caldwell, Michael Seibel
**Type:** Video
**URL:** https://www.ycombinator.com/library/IT-dalton-michael-why-investors-can-t-fix-your-company
**YouTube ID:** UqKzpLqXuI0

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Dalton Caldwell and Michael Seibel on common pitfalls in the advice from different types of investors and why you, the
founder, are ultimately responsible for the success of your company.

## Transcript

hey dalton you're a pre-product market fit do you have five-year financial projections that's a great example of that financial projections may be a good idea later stage but to even ask me if i had financial projections i was like what's a financial project this is michael cyber with dalton caldwell and today we're going to talk about why investors including yc can't fix their company for some folks it's like telling them that santa claus isn't real you know you're like they're like hey we finally get some time with

you you know no one wants our product what should we do here's some here's our designs can you help me design this so growth takes off and i have to tell them the unfortunate news which is i have no idea and like i went through this through two when i was a founder that i really believed that once i raised from the top investors they would tell me whatever secrets they were holding out on the world what's unfortunate is that there are a lot of investors out there who aren't

former founders right who haven't really um lived these mistakes themselves and if you haven't been humbled by having a crappy startup like we did that failed a lot like we did um it's easy to sort of like think your hot it's easy to think that your advice can make companies work that like you are the magician and what's interesting is that over the

years a lot of yc founders will kind of start following the advice of these people and they'll make very very common errors and you can almost track it back to like oh i kind of understand the type of person who is giving you this advice because i see what you're doing now and like this matches one-to-one so one of the most common types of investors is the investor with the finance background someone who's like never run a company never operate in a company pure finance when all you have is a hammer everything's a nail and so

if what you know is money the solutions usually involve money so raising more money spending more money throwing money at the problem right hey dalton you're a pre-product market fit do you have five-year financial projections that's a great example of that financial projections may be a good idea later stage but to even ask me if i had financial projections i was like what's a financial project like michael how how many years in your startup did you learn what a balance sheet and was

long time actually and i resisted it i resisted it our ceo kevin was like this is important for you to learn and i'm like you know what's important for us to learn how not to lose money every month before we die like and the balance sheet is not really telling us that it's um it's that we make no money and we spend money so that's what's that's what the problem is you know for these folks i get it right you you spend time in spreadsheets especially if you're doing stock market investing or private equity investing it makes sense that your weapon is money

and you move money around that's your leverage point that's your point of leverage what's the downside of internalizing that too much man i mean we see this all the time which is like scaling negative you could a unit economics or spending a ton of money in advertising with ever ever worse um payback periods or no payback period ever it's really like getting people to work on things that are not making their product good yeah and i think whatever patrick collison was talking about this when he

came to speaking of bats recently where he's like listen let me let me be blunt too many founders treat product as an afterthought they're basically trying to do financial engineering and the product is like delegated i think what's also tricky is that like this strategy isn't always wrong like for successful companies there is usually a point where throwing money at it is a good idea it's just kind of knowing when to give that advice and when not to it's when you always give that advice is

when things get really tricky all right here's the second type that's that's common in the investing world the big company exec the person who's you know seen seen companies at a thousand plus people and have a lot of experience and have done like great work in those companies and now become investors folks with big tech experience are really great at taking a successful product and scaling it further or refining a product okay it just is pretty different when you were

employee number you know 100 or 200 at airbnb or google or facebook than employee number five and as we spoke about in a prior video our our friend and colleague paul buhit you know number 18 at google had was like the king of dirty hacks in a lot of ways you know when we would interview former googlers and he was in the room he would he wasn't on he didn't love some of the instincts of folks that it was the same company that they worked at

but the the tactics that they brought to bear when you were employee number 1000 to scale up one of these core products was pretty different than the folks in the first 20 employees and so generally with these folks it looks more like scaling a process it looks more like scaling up hiring and kind of sometimes taking for granted that getting any users at all is really hard like i talked to about folks a lot about this in the batch man like what failure usually looks like for a lot of our companies is they get zero

real customers yeah zero it's not that the failure was they couldn't get a series a it's that they just like bombed like complete disaster and so if you have too much of this mentality of like big company pm it doesn't even occur to you that you can fail that badly yeah what do you think i think it's tricky because all too often this group of folks are giving founders the advice of hiring executives before product market fit it's like you

need to build up the company it's like marketing doesn't work we need a marketing executive like like um the the engineering team isn't productive enough we need a vp of engineering and and more often than not in this pre-product market fit phase the mistake is that there's the wrong person in the company not there aren't enough people the mistake is like you've got an engineer that no one wants to work with or no one's measuring any of the marketing results right it's like those are the mistakes not like you don't have a department for it or an executive to run it

whereas we go right back to the first one right when a company is scaling and growing post-product market fit like hiring more people is essential it's like once again we get this weird dichotomy think about the first five employees of facebook and the first five employees of instagram before when it was started before they got acquired the first five employees of youtube when it was a startup before it got acquired versus the really awesome people post acquisition who had to step in and scale

that thing those people are awesome hallelujah they're super valuable and if they weren't around on the in the zero to one stage watch out again what i'm saying like it's a very different muscle to build scaling instagram post acquisition if you were on that team than being getting the first 100 users when you were the founder of instagram right very and there's a whole lot more actually supply and demand there's so many more people that helped scale instagram than there are people that

founded instagram yeah right there's just a lot so there's there's lots of folks that have lots of experience scaling products and it's you just don't meet as many that did the zero to one yeah so the next category is the successful entrepreneur in the non-in a non-tech industry and and this is really common this is really common internationally in like new founder ecosystems where like the people funding them maybe didn't make their money in tech

what's the common kind of advice given here yeah this one's tricky um where if someone made all their money investing in real estate or in strip malls or franchise mcdonald's franchises or something like just something that is not remotely a tech startup they will often ask for crazy terms that would make sense if they were investing in like a franchise store um they may ask for more control and they may be really stressed out all the time that you're going to lose their money and so a lot of the trickiest

investors is a nice way to say it that i've seen um the yc founders are like oh why did i take their money it'll just be someone who's totally well-meaning but they treat this like an investment in a subway franchise and that you're the manager of the subway franchise and they're gonna call you and yell at you or something that you're gonna lose their money as opposed to letting you do your tech startup and that's really just like they really these folks are like you can't be mad at them they're just taking the principles that they learned

to make their money and applying them to a different industry right and it's like totally in some ways these are people you can be mad at the least because it's like at least they're they were successful themselves and they're like taking things that worked for them right like they're not reading this on twitter um but it is tricky because like i think what we've learned is that industries are just different like you know maybe there's some common principles but like in general software companies look really different than a lot of other companies out there so

all right here's the next investor type the junior investor the person who just got started looking to make a name for themselves still early in their career oftentimes um having to really have a win pretty quickly to cement themselves in this career um what's the most common type of advice that these people give yeah i think this one is tricky i think a good mental model is to put yourself in their shoes i think when you're a new investor or you're newly hired at your job you're not in a position of power inside

of the place that you work or you're not in position power with your investors because they want to raise money from someone else and so to show weakness or to like screw up their first few investments is very bad for their career and we know lots of people that basically don't last in the industry because their first investments were bad like it's kind of career suicide to become an investor not have any other track record and then make some bad investments yeah like you're not gonna make it okay and so basically these folks

are very optimistic that it's gonna work that you're gonna make it work that you should totally go raise more money yes because they're they're kpis that if you raise money and they can mark up their investment it makes them look good so they can go tell their colleagues or their their investors hey i invested in this company and it went on to raise more money at a better valuation than i invested at i'm really working yeah right and so the thing to understand is that's their kpi and so in your interactions with them they will often just really encourage you to fundraise and to

keep doing that a lot and everything's working great and you do have product market fit and you should scale faster yeah right and and it's interesting because another example of like they're not trying to hurt your company like in many ways they're nice people yeah in many ways they're like some amongst the biggest cheerleaders for your company it's just that like your company at this stage probably has some really broken that has to be dealt with and so unfortunately

it's harder for them to kind of go and spend the time in the dirt with you on that stuff because it's going to kind of break their illusion and um hey you know it's it is what it is it's rough like if you're a company where it doesn't make sense to raise for a very long amount of time it may be the right thing that you want to do but may not be great for them if their whole thing is to prove that they're great investors really fast so that they can keep their jobs so the next category investor we see a

lot is the influencer famous person um what do you when i think about this kind of person this is the person that would come to a yc demo day and everyone would freak out to get them on their cap table yes they just yeah they just get you know infinite access um how do you think that they try to help founders who are who are struggling i think that you really understand distribution if you're an influencer because that's your game is building up your distribution

network which you can monetize a bunch of different ways right if you have a million you know instagram followers or a million tick tock followers you can make money off that and you get it you're savvy so i think these people are very savvy and realize they can kind of treat startups like other ad deals of being like give me some stuff and i'll promote you and so a lot of times these folks will like ask for advisor shares or they'll ask they'll just ask for things and again that's how they got big they're good you know they know they know what they're doing

um and it can be so tempting to do it to think that like celebrities tweeting about your thing is gonna fix all your distribution problems and like maybe in some cases they do but most of my experience both personally and with founders and yc is the founders kind of feel like they got a raw deal on these and that the the clicks they get from the from the posts or whatever were not as helpful as they had hoped this is a nice way to say it and you know what's weird about this dalton is

that the the best most reputable influencers and famous people in tech world they don't promise distribution like they say i'll try to help but like i think the founders set expectations way too high like it's the founder once again looking for the silver bullet someone else solved the problem for me and um man silver bullets don't exist all right we got two more types here so two more types type one is other founders so this is becoming a lot more common nowadays right like

founders investing each other's companies it's you know some people have seen success doing this others not but what's the advice that you know most often you're going to get from another founder to help you when they're on your cap table usually when you get advice from other founders it's heavily based on their personal experience the but like the downside of that is if they're really if they really struggle to fundraiser with fundraising personally all their advice is gonna be them basically telling you don't do what

i did or if they struggle with distribution all their advice is gonna be around you know like they're almost like they have a lot of feelings about what happened to them again this is where founders do dude like a lot of my advice was heavily based on my personal experience and it only it took years of me working at yc to sort of break out of that trap which is to not be so autobiographical in the things that i'm telling people you know i think this is something that like people don't understand

enough is like how much we are learning from the founders that we're working with and how much we are condensing their learnings and delivering it to the next generation of yc founders versus how much we're condensing learnings personally that we got in our own companies i think that's like very counterintuitive to most people um the last one is the extremely young investor right the the just out of college writing a check sometimes this person's in college writing a check

um and kind of trying to to build a career in our world different from the this person often is different from the like junior investor because this person's usually not working at a vc fund or they're a big fun like that they're usually kind of a scout or some kind of in that kind of role what's the what's the advice they're often given yeah i mean look these people are super sweet and they're super exciting you know to talk to i just think that like the same way that the founder realizes

their job is to play the part of a founder and so they like watch movies about how founders are supposed to act and like read books about it and they sort of are being like am i doing it right am i a founder now like i think you kind of see this from these investors where they just they read what other investors say and do and they sort of like say and do whatever it is they read and so like whatever the hot new trend is whatever people are tweeting about whatever like latest essay they've read they just sort of like repeat that

and see if and hopefully no one notices that that's what's going on which is which is how people learn in school right so it kind of makes sense like it's exactly the same so you know one of the interesting things here to kind of wrap up is that we make mistakes like we screw up there is a yc partner common bad advice kind of mode and um you know we were talking about this before the show and i think you said it right which is like the kind of lean startup

don't hire don't spend too much money like talk to your users put a shitty mvp out in the world path is the path that works for everyone in all cases i think sometimes we can fall into that trap but there are many examples that doesn't apply right like what are your thoughts on on where yc partners ourselves we can get trip up and give bad advice yeah i think that the biggest critique i would have of ourselves

is that sometimes it works right out of the gate and sometimes you can spend two years building a product in a cave and never talk to a single user and it's perfect and you immediately get product market fit sometimes that happens i think that we just we have we have enough data points that it seems like insane of us to ever recommend that strategy statistically yeah like it's like

it's like hey oh you have cancer oh well you know if you you know go on a water fast that might fix it like maybe i think that it just feels a bit hard for us to recommend making a strategy to not do those things but we have enough data points of yc companies we see companies that can't bootstrap or can't launch an mvp and have to go build something in a vacuum for two or three years yes and sometimes it works yes yeah right

the best yc partners are very careful with how forcefully we give the yc advice because like the longer you hear the longer you have a kind of running record of the time i told someone to do it like this and the opposite worked yep and so you know honestly but to me you know what the lesson is there michael the founders that made it work believed in themselves and they knew that we couldn't fix it like they actually internalized the whole meta point of this video or at least what i'm trying to get across with it which is like you know they they took bits and

pieces they they they took information from the outside world but they took personal accountability that they're the ones who are gonna have to make it work yeah and they weren't counting on blindly following anyone is being the way it ain't right nope and and especially including us yeah i think that the big takeaway here is that as a founder it's your job to figure out how to best use these people who are here to help you all these investors who are here to help you it's your job how to figure out how to best use them they all have your

interests in mind but none of us can tell you exactly what to do to win none of us and like it's funny because at the yc kickoff the first thing we say is that you know we're experts in failure we know a lot of paths to not take but if you want us to sit next to you at your desk and tell you everything to do to win to become a billion dollar company we can't do it and we actually ask them we're like hey and if you want to leave yc right now we'll we'll take or give your shares back like

we don't want you to come in here with any false pretenses like this is a hard problem most people don't succeed and like you're going to be able to deserve 99.9 of the credit if you figure it out because you figured it out all the rest of the people around who helped you they didn't figure it out dalton before we close you know we've talked about a number of examples of when investors give advice and it kind of pattern matches to where they come from but might not apply to you at this time

what are some of the pieces of advice you've gotten from investors that have really made a huge difference like what what what is what's been some examples of great investor advice because you know i think you and i both have these i think the best investor advice i ever got as a founder is that i was swimming in my head with too many ideas at once and i had too much data and that someone from the outside could look at everything and be like oh this is working they could take they could take all of

this like consternation and like complicated stuff and like i can think of a couple times in my life when someone was just like this is working you should do more of this and they were right and it added a ton of value or conversely this is bad you're failing yeah and again i was full of excuse like like my brain was full of like a thousand different threads going a different direction but to have someone synthesize that into something very simple

was super helpful dude i got great advice like that when i was a founder number one number one piece of advice we ever got was from you know someone who experienced big companies guy named gideon you and we had just gotten justin tv profitable and we were very proud of ourselves um and we the first year we really tried to monetize we made eight million dollars in annual revenue which i think now would qualify us as like a decacorn or something um and he came to talk to us and he

basically said folks look you should be happy congratulations but your company sucks if you don't change stuff it's all going to die and all the work you put in so far no one's gonna remember what you did and what's great is like there was no like and so you should do this it was just more like and that's that's my current status of your company in a nutshell and it's exactly what we needed to hear we just like the best investors point out the problem they don't give you a solution they just point out the problem and they it's true we knew it we knew

that was the problem too it's just when someone says it to you you're like oh crap but isn't that funny because again like so many incentives in life are set up to be nice or to tell people that they're great and they should stay great and everything they're doing is great and they're taking over the world but weirdly again if i think back to the founder advice that i got and same with you it's actually when people were kind of hard on us yeah that that was actually what was hopeful yep right well you know it was crazy one of the reasons why i think gideon felt so comfortable giving that advice is

that he had no interest in investing in us at all yeah he literally had no interest and you know that's a counterintuitive thing right like wow it's like really you can get a lot more honesty out of somebody when they're not financially incentivized to kind of blow smoke up your ass to you know to say nice things so all right
