# Inside the Group Partner Lounge: The ideal customer

**Author:** Harj Taggar, Michael Seibel, Brad Flora
**Type:** Video
**URL:** https://www.ycombinator.com/library/J5-inside-the-group-partner-lounge-the-ideal-customer
**YouTube ID:** Hwfu1zNwSWI

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Step inside the Group Partner Lounge to hear Y Combinator Group Partners Harj Taggar, Michael Seibel and Brad Flora
discuss the pros and cons of startups selling software to other startups. Or is there a better approach out there?

## Transcript

i just want to turn my startup into like a real-time strategy game where i can sit at my computer and click on things and watch numbers go up if i can do that and just sit on the couch and have people bring me food and i click things we're in good shape [Music] hello this is michael with harjin brad welcome to inside the group partner lounge as y company to group partners we find ourselves often repeating the same advice over and over again during our office hours with the startups we work

with for covid we'd often gather together in the group partner lounge the yc office to try to figure out why this was the case and how we could help startups figure it out faster and today we're going to talk about when is it a good idea to sell software to startups hard do you want to set this one up yeah so you know i think especially amongst yc companies selling to other startups has been a formula for success so some of our top companies like stripe started out being just a payments processor company for other yc startups for a long

time uh pagerduty one of the first yc companies to go public like all of their early customers were other startups and even when you read their s1 filing when they went public they were still referencing um lots of those startup customers years later so it's clearly something that can work really really well i think the interesting thing though is when it doesn't work right like when when founders are kind of maybe cargo culting not understanding why these folks do this what do you think about that brad

yeah so um people have seen that those companies uh started off selling to startups and assume that they should do the same thing too um but it's not always the best move for them um and there's a whole lot of reasons why companies think that they should be doing it and it's not the best move for them i think the the first one that i see all the time and michael we've worked with some companies together that did this where their product naturally should be sold to bigger companies there's the only people that want them

that want it but the sales cycle seems really long and so they're worried that if they just try going after those big companies they won't get any traction and the company will never take off and so therefore they should try selling this very enterprisey product to startups this one is so painful because you know we will see a founder who worked in some large company for three four years who saw a problem in that large company who has a ton of insights on how to

solve that problem for a large company it's a problem that tiny companies don't have at all one of the core reasons why we funded them was because they have this experience and they understand large companies so well and then in the first office hours it's like oh no i'm going to sell this like enterprise grade alerting like devtools system that is really only useful when you have over 500 engineers but i'm gonna try to sell it to startups for 100 a month 400 a month yeah yeah and like three startups want will talk to me about it

so that's evidence that like it's solving an important problem for them and i don't know about y'all but like that was like that's always like that officer i'm just like oh no like please how do i get you to not think this way and this like classic examples of this right like if you look you know companies that went public even recently like snowflake like snowflakes basically a company you only need that product if you have like massive amounts of data so in warehouses right like if you tried selling snowflake to a startup they you just waste your time

i heard a story i remember about work day like big hr company um and apparently like you know all of workdays early customers were doing like six seven figure deals with them because you only needed some big comprehensive hr suite if you already had like hundreds of employees two amazing examples you know the other lie that i see early stage companies telling themselves is that it's going to be easier to sell startups like it's going to be easier and i always try to push back on that and

say why did it be why would it be easier to sell to a customer who doesn't have the problem than to sell to a customer who has the problem but takes a long time to make decisions like i understand it would suck to sell to a customer it takes a long time to make decisions but it only seems like it would be worse like the only thing worse than that would be to sell to someone who doesn't have the problem at all yet a lot of times founders are not seeing that that weird that weird horrible path they're walking it's it's the same thing with the last lie where just because someone's willing

to talk to you at all doesn't mean that that that's an easier sell um and so yeah people confuse oh these other startups they're willing to talk to me about this problem even if they don't actually have it um therefore i should be selling to them i think even interesting like i think so another version of that is let's assume that startups do have the problem i think uh sort of a liar or mistake founders will sometimes make is they'll assume that the startup's an easier customer than the enterprise customer

that oh they'll be like lower maintenance or they'll just you know um won't be so demanding and i think there's a grain of truth to it you know like sometimes you have to jump to like enterprise companies make you jump through more hoops and fill out more forms and you know to get onboarded but like once you're actually got someone who's using your software there's not that much difference like the end user can be just as annoying and just as high maintenance and be bugging you every day um whether it they're like working at microsoft or they're working at some small startup and what's funny is that

when that end user's at a big company they're probably paying you a lot more money so you can like you know afford to support people to reply to them startups can be super demanding and not want to pay which is a great combo you know the other one i was thinking about a lot is we have a lot of yc companies that think oh i'll sell an early stage company and then they won't churn as that company grows but what's interesting is like in some categories it's almost assured you mentioned hr

like almost every single early hr company gets chur like their all their customers churn as they grow you know another class example that we talked about before was heroku where like all the customers churned as the companies grew so like just because you get someone early doesn't mean they'll stick right not at all and i think that's the number one aspect of this selling to a startup strategy where companies fall down right like if you if you do have a product like stripe where you can actually just

grow with the companies they never churn it's a fantastic business model like you get businesses like cheap when they're like two people and they stick with you when they're like thousands of people and doing like billions of dollars in revenue or like awesome but yeah i think that you have to be thoughtful about is that actually going to happen or you're going to end up more like a hr system or a heroku type product where the company hits like 500 employees it's like well you're no longer working for like this doesn't work for us we need something brand new or we need you to

custom build something um and then you sort of either your choices are let them go or become like a sort of outsourced dev shop for for some big enterprise customers yeah and what's happening there is the buyer is actually changing right so i'd see this with my with uh with my startup perfect audience where early on we could sell the startups because it was just like the founder or one of the like a marketing person but later once it's a marketing team once things have changed there they need a totally different product and it's the same with heroku like early on the dev

team is small they have certain requirements certain constraints but later when the organization's a lot bigger those constraints just become too much and they can't just use something like heroku anymore i said we had the same thing with triple bite where like we were building software to help you know people screen engineers and the the first version of it was a highly technical product uh that was built for engineers to screen other engineers and it worked great when our customers were startups because the user was always like a cto or the technical founder or like another engineer but

every company eventually hires a recruiter or recruiting team and those that teams completely non-technical and it was basically like we have to build a brand new product to work for them because it because it was it was like completely different end user yeah and maybe what we're getting at is that like with stripe they don't have to build a brand new product because it's doing something that companies just don't want to mess with right like payments where's this other stuff like you're going to be recruiting in-house you're going to be doing marketing in-house you're going to be doing hr in-house yeah i was thinking crm kind of falls in

the same category where like startups will pick any kind of lightweight crm and then the second vp sales wants to scale a sales team to 500 people salesforce like it's always salesforce you know and that's such a tricky thing for founders to realize is you know maybe a lot of these have to do with the fact of like when something scales with people versus revenue right like hr tools scale with people crm skills with people um whereas like

you know payments doesn't really scale with people like in in the same way so i don't know maybe there's some insight there but certainly there are certain categories that just religiously will churn out early stage products um but maybe the last one on this front are lies around sales right like and i think that's that's the deadly one right what do you think about that one brad well sales is scary um if you're someone that has more of a product background and you find yourself building a software product that's for businesses

you just might not want to do any selling and so um the the fallacy i would call it like the civilization fallacy where you think i just want to turn my startup into like a real-time strategy game where i can sit at my computer and click on things and watch numbers go up and if i can do that like i'm really good at playing civilization if i can do that and just sit on the couch and have people bring me food and i click things we're in good shape but the reality is like you have to go sell people and you have to change people's behavior and you

have to go like influence them and get them on your team and get them excited about your product and that's sales and so a lot of times i think when startups want to sell just to other startups it's because they are afraid to do the sales and they think that this would get them out of it yeah i love that one like you know we'll talk to an early stage company and their whole kind of cell strategy will be put a self-serve flow and wait and you know it's like you know mvp

self-serve flow dot dot dot riches you know some ads oh yeah maybe some ads yeah yeah yeah maybe some press maybe you know and i just love the dot dot dot part it's like clearly that's all you need right yeah we we see this happen a lot during batches right because it's like hey like you need to go and do sales and it's like well like i've got all these other founders who are in my bachelor i interact with every day anyway so like it's no extra effort for me to just drop in like hey like do you want to try out

my product um but it's like that's a perfectly fine place to start but it's like that's not there's so much of sales it's like how do i get anyone to know who i am how do i get to reply an email like what's the right messaging and you just like lose all of that when you just ping the people that are accessible yeah this is a pretty basic thing but it's it's uh it's just important to state that what you build is just as important as what you build to get customers and a lot of startups don't understand that and and just building a great self-service interface

is not necessarily a strategy for getting customers and you've got to have that figured out i think in order to build a big company now let's talk about the flip side here because as you said in the beginning harj selling to startups is one of the core strategies that yc companies have have employed to to create billions of dollars of value i would argue it's one of yc's superpowers you join yc you got so thousand literally thousands of potential startup customers you can sell to so let's talk about

how selling to startups can be a powerful strategy are there any kind of examples here yeah i mean one that springs to mind is i think of gusto payroll company um that uh yc funded is doing tremendously well right like i think they started with startups um and they became like the de facto payroll provider for for yc companies and used that actually as sort of like a bridge into the smb market just the broader small business market huge market in america um and that's where they found the sweet

spot and my and what i my sort of impression from the way they operated is that um although sort of traditional smbs are different businesses to startups like the product the software is very similar and so they could basically train themselves build a really great product build a really great user experience with startups and then branch out into like the smb market with a product that was already really great i think another example here is that when selling to startups creates a path to the large enterprises and so you know when you think about

when aws first came out amazon didn't have the kinds of relationships with large companies that microsoft did so if they want to eventually become the product that those large companies use to you know bring their compute to the cloud how do they penetrate those markets well it turns out selling to a bunch of smart engineers at startups those things they loved was a great strategy one startup started getting growing on it two those engineers might go from a startup to a larger company and like aws and try to bring

them in and three they were just training this whole group of people on how to use cloud software and like that was a big big big avenue into the enterprise that like they had to invent because they couldn't walk the microsoft path of just you know call up everyone who uses office and say do you want to use my cloud computing thing too i think there's a really important point about that which is so that i think that's become known as the bottoms up sales strategies become quite popular it's like hey like you get your you get the developers you get people to be evangelists and then they help you make

the sale and that is true but i point that people forget is that those companies like the aws or stripe who's another popular example for that um for that strategy they still end up building like real enterprise sales teams like this is supposed to be like something that gives you like a booster it helps with those efforts like it's a real like a really smart strategy but eventually you still have to have someone that's making the enterprise sale it's just like hopefully now they can say look you're like your whole development team's already using it

they're already advocates like you really should get this sale done it's not like walmart's just gonna like walk into your self-serve flow and like yeah they don't just sort of magically one day switch themselves on because like some of like their engineers said that they should right like you're gonna have to make a sales deck so let's wrap this up what what is the what is the big takeaway here on when it's a good idea to sell software startups and when maybe it's not the biggest picture way i could i could frame this is that you have to know which game you're playing and so

it's absolutely reasonable to have startups as your first customer if you're hey my game is i'm playing the stripe game which is i'm gonna get these custom companies when they're like two people and an idea and the product's gonna stick with them all the way through to like ipo and billions of revenue right or you like some of the other things we said hey like you know i'm gonna be like gusto i'm gonna use startups to build a really awesome product and i'm gonna take that product and launch it in different markets um but the key thing is you have to know that you put like the game you're playing and how selling to startups fits

into that right like the game of i'm gonna sell to big companies by first selling to people that have nothing in common with big companies that's not a good game and i think what's funny about this and my kind of final takeaway after talking to so many founders is these games are are are out there like you don't have to invent this stuff like you know you can actually try to understand the difference between gusto aws stripe and you can copy their strategies um which is very different

from product where you really do have to do a lot more innovation and so oftentimes my best advice to the yc company is like all right which of these paths so you want to go who is the company who's nailed that in the last 10 years go study them like learn everything about them you don't have to learn all the hard mistakes that they did you can you can learn from them awesome well brad harge great to see you both thank you thanks guys bye [Music]

you
