Earlier this week, news broke of a Y Combinator letter sent out to all founders of YC companies. The contents of the letter went on to spark some debate on how much YC contributed to the correction in startup valuations.
There seemed to be a lot of confusion around what YC tells founders during the batch - especially around valuations. It also is becoming increasingly clear that the S21 batch might have been the one to have the most founder friendly Demo Day to date. So I wanted to take the time to provide the 3 biggest lessons we learned at Y Combinator - with some opinions intertwined - that will clarify things. Given how things seem to be looking (to use a quote, "No one cannot predict how bad the economy will get, but things don’t look good.") these lessons are more applicable than ever.
Lesson 1: You only hear good news
Survivorship Bias is one helluva drug
The classic example of survivorship bias is based around bomber survival in World War 2, but for those who are not familiar, survivorship bias is essentially the logical fallacy of failing to consider entities that did not make it past a selection process. The startup world is full of this, and its incredibly easy to fall prey to incorrect conclusions from here. You never hear about the startups that fail to raise the Seed round they wanted, or raise a Series A. Even for the companies that do raise a Series A, you never hear of the times they failed to raise one before that!
Dalton Caldwell, one of our YC partners, talks about this in one of the most recent YC videos. Every startup journey is loaded with 'gut punch' moments, but these aren't the experiences that are publicized, or make news. The YC partners do a great job of sharing their personal moments throughout the batch, with a simple message. The majority of startups, even YC startups, are going through the same experience as you. You'll see the fantastical headlines, even see some of your YC batchmates raise at insane valuations. Don't let it get to your head.
YC's stance regarding valuation was simple. Figure out how much money your company needs. Don't overdilute. And regardless of what you hear your peers raise at - understand that it has little to no correlation with company success. All in all, keep your valuations reasonable. But, inevitably you'd hear about some founder in your batch raising on uncapped notes or some bonkers post-money valuation while still being pre-product and ask yourself, "why shouldn't I do the same thing?" Some founders would naturally succumb to this survivorship bias.
So, whenever we heard news of crazy valuations during the batch, we took it upon ourselves to remember that this was just the Good News.
Lesson 2: Indecision kills
Avoid 'pivot hell'
During our YC batch, our Partners put companies in sections, groups of around 10 companies that met weekly. Dots' section was specifically full of very early stage companies - ones that were either admitted before having any customers (like us) or just had a few lined up. A lot of the companies in our section ended up pivoting, including Dots.
Pivoting quickly, even if you weren't sure your pivot idea was a good, was of utmost importance. Dalton once tweeted that startups run on optimism more than anything else, and pivots one after the other just drain that battery. It's better to pick one idea and stick to it for an extended period of time. Even if it turns out to be a bad idea, your learnings will make it a worthwhile exercise. Now, this advice isn't carte blanche to impulsively jump into ideas, but instead just a warning to avoid going from idea to idea. Likewise, sitting around and waiting for the 'perfect' idea isn't a great use of anyone's time either. When an idea feels like it has legs, no matter how small, the best thing you can do is to test it quickly and effectively (Do things that don't scale).
To use Dots as an example of what a 'good' pivot is under this framework, we decided to work on payouts as a problem about a week after we had first considered it. Within the next 7 days, we had a ProductHunt launch for the new product and a customer to try it out.
Lesson 3: Don't lie to yourself
Product Market Fit has only one signal, your KPIs.
The only thing that defines Product Market Fit is your metrics. When it comes to PMF, nothing but your customers' opinions and your KPIs are relevant. Raising from a famous VC, or are getting a lot of headlines doesn't replace actually increasing metrics (although they definitely can help indirectly!). Your focus in building a business should be talking to users and coding, especially in the early stage. Product Market Fit isn't found on a cap table, those are people to help you get there! Instead, spend most of your time either building or selling your product. YC emphasized the get out there and build mentality above all others.
At Dots, we define Product Market Fit fairly aggressively, and in a way that means its never permanently achievable. To us, PMF means that our product generates so much demand that we don't have enough resources to keep up with the demand - i.e. everyone who wants to use our product. I think this is a great framework to evaluate your own company against, because it scales as your business does. The bar for PMF at a company of 5 people is fundamentally different than one of 50, or 500. Each stage has its own challenges, and finding a fit for your company at each stage is the true job of a founder.
Now, go talk to users and build.