Ycombinator – An Operator's Blog

Are Solo Founders Venture Backable?

With prevailing startup (particularly accelerator) dogma around solo vs multiple co-founders, the reality of how businesses actually get built the world over is quite different.

In various contexts, both in terms of new deals I am evaluating as well as some recent developments in the portfolio, I have been mulling over how I should be thinking about backing solo founders.

Classical VC guardrails tell me to stay away from solo founders. YCombinator has almost made the classic “two co-founders” team into startup dogma. In my past venture roles, I was taught to filter out solo founders in the first pitch meeting itself.

However, my lived experience of my own portfolio, as well as observing many more startups in various situations, tells me that this discussion deserves much more nuance:

1/ Anecdotally, at the pre-seed/seed stage, I have noticed that at least 20-30% of founding teams end up separating in the first 24-36 months.

Btw, this number aligns with the below analysis ChatGPT put together on this question:

So the reality is, as a seed investor, while you might be drawing comfort in backing the classical 2-person, “technical + GTM” co-founding team, it’s very likely to be a false signal, and if the company ends up surviving the valley of death, it will most likely fall back on one founder.

2/ Even in classical 2-3 person co-founding teams, one founder is usually the Alpha, the lead who inspires the core of the trust & conviction that investors build around the company. In almost all cases, the Alpha is also the CEO of the company (if the Alpha isn’t the CEO, then the team has bigger problems).

In my experience, until the Alpha doesn’t give up on the company, we all stay in the game, as even after team splits, the Alpha has the vision, tenacity, and storytelling skills to hire new talent, and even onboard another set of earned co-founders.

So, with the probability of founders splitting being significantly high, even while backing a full-stack founding team, the reality is that we as seed investors are really betting on the sole Alpha founder as the core kernel of the company.

3/ This is the one I have a real pet peeve with – another YC dogma that founders should always split the equity 50-50.

I understand what YC is trying to say by propagating this idea, and maybe it even makes sense in the specific context of its target persona: young, out-of-college people ganging up together on short notice to “attempt a startup”.

In my experience, this notion of a 50-50 split has turned out to be entirely disconnected from the overarching ground realities of how businesses the world over get built, how teams get structured as per both the risk each person takes as well as the tangible value they bring to the table.

One of my driving principles around early-stage investing is that, irrespective of tech or non-tech, AI or non-AI, Silicon Valley or India, some fundamental principles of “how to build a new business” never change. Things like you need to target a very clear customer persona, your value proposition should achieve both the job-to-be-done and do it in a differentiated way against competition, the core unit economics of your business should be profitable, you need to be present where your customer is to drive distribution, the lowest cost producer will always have an advantage, etc.

These are principles that keep getting repeated across generations – from Charlie Munger & Warren Buffett to Sam Walton and Jeff Bezos. You can almost call them “Business Laws of Nature”.

I have repeatedly stress-tested and validated these principles both as a repeat founder myself as well as a venture investor for more than 15 years now. Each and every time, I have found these principles to be true, and whenever anyone has tried to pitch, argue, or sell any notion that violates any of them, the person has lost, and the principles have held their ground.

A dogmatic 50-50 equity split rule is in violation of these business laws. I haven’t heard even one generational founder, be it 1st-generation or a family business, ever talk about it. These people have built companies that have stood the test of time and delivered true value for decades to both customers, employees, and shareholders. If this isn’t something that they have acted on or professed, I am inclined to believe that this 50-50 split is more of a Valley YC dogma and shouldn’t be taken as set-in-stone advice.

In fact, let me give you a different, and might I say radical, perspective from the non-tech, real operating business world. In his amazing book with a super-cheesy title – “How to Get Rich”, OG media founder Felix Dennis (who started as a college dropout, with no family money, created a publishing empire, founded Maxim magazine, & made himself one of the richest people in the UK) had this to say on ownership (sharing excerpts):

To become rich, every single percentage point of anything you own is crucial. It is worth fighting for, tooth and claw. It is worth suing for. It is worth shouting and banging on the table for. It is worth begging for and groveling for….

…Never, never, never, never hand over a single share of anything you have acquired or created if you can help it. Nothing. Not one share. To no one. No matter what the reason—unless you genuinely have to.

So, if you refuse to believe in the 50-50 equity split startup dogma, implicit in this is the argument that, more than solo or multiple founders, what really matters is whether the ownership split between the starting bunch of individuals makes sense from the perspective of the fundamental business laws of nature.

TLDR: the devil is in the details…

Therefore, my working POV is not to discount single founders straight-up. Especially if the founder is a compelling Alpha, has shown the ability to hire top talent, and execute on the business, it makes sense to dive deeper into the L2 and L3 level details around the genesis history, why the founder has chosen this operating model, what it says about their behavior patterns, and what their go-forward thinking is on this topic.

Note: if you are intrigued by this topic, check out one of my earlier posts – ‘Co-founder Breakups’, wherein I share some insights/patterns from various co-founder breakups I have witnessed over the years.

Drip-feeding For Better Post-Seed Execution

With millions in the bank post a seed round, Founders often face the challenge of maintaining disciplined execution. Excess capital often ends up slowing progress towards real PMF. I share a brain hack to counter this.

Was in a working session with a founder recently. The company is going after a huge market opportunity and has raised a low single-digit Mn seed round from some very good VCs.

Issues with too much early capital

The issue though is that, like most category-creating seed startups, the precise customer persona and pain points to be solved are not obvious right now. After just a few months of execution, it’s quite clear that the company will need a grinding customer discovery process, with long and deep engagements with early design partners.

In my eyes, this is all great. As an investor looking for non-incremental startups, I precisely expect this and in fact, get excited by it. Sharing an excerpt from my post ‘Building…one at a time‘ on my learnings as a founder on the 0-to-1 stage:

When the absolute user numbers weren’t met, my morale as a founder would get hit with each iteration. In hindsight, hitting numbers shouldn’t have been the goal at all. The ideal 0-to-1 mindset is like that of a scientist, with curiosity being the core driving emotion, backed by an iterative product development approach. The target outcome of this approach should be to gather insights that help refine the hypothesis.

Similar to how scientists drive their research process one experiment at a time, I have realized that building any new product or service from grounds-up requires moving one “unit” at a time. It’s up to you to decide what that unit should be – acquisition, activation, frequency of use, revenue or even just getting qualitative feedback!
Building…one at a time

The challenge is when a company has raised significant capital relative to its stage. While this de-risks the company from a runway perspective and opens up many options in each execution track, having money sitting in the bank often puts undue pressure on the founders to use that capital.

In my experience, this pressure starts manifesting in many ways at an operating level:

1/ While the seed stage needs founders to be directly talking to customers and building product, capital often creates a tendency to do premature functional hiring and delegating core aspects of PMF progress to new employees.

2/ Even as a seed startup is still figuring out the customer persona and pain points that it needs to solve, excess capital drives founders to invest in GTM even before the company knows what product needs to be taken to market. This could involve unnecessary paid marketing, attending events vs talking to customers, building PR rather than product etc.

3/ Excess capital can often create an environment where the team starts to feel victorious even before any material progress towards PMF. The mindset shifts from ‘doing things that don’t scale‘ to ‘doing fake work’ via mindless reps.

Ultimately, this creates a massive risk of founders not being honest to themselves about execution and learnings, while also setting wrong expectations with their Board/ investors. Most investors aren’t builders anyway, and given their primary concern is the next round markup, often push startups to increase burn and “show numbers” prematurely. Unless the founder can push back with a high-conviction execution philosophy that they believe the company needs at this stage (I espouse founder-led, lean, frugal tiger teams doing things that don’t scale), this Board pressure will create a negative flywheel.

Only founders who are honest with themselves about where the startup really stands can then push back on investors with the best model they believe is needed to make progress at this specific stage.

Drip-feeding as a brain hack

So, how can a founder create this disciplined, frugal, ‘doing things that don’t scale’ mindset even with millions sitting in the bank? During this working session I mentioned at the beginning of the post, I blurted out a brain hack:

“What if we just virtually ring-fence the funds, maybe even create a CD or something, and give ourselves say only $500k (the standard YC deal amount) or something similar for the next 6-12 months to execute? In a way, we use this artificial scarcity to discipline ourselves, and drip-feed execution till a certain set of milestones are reached.”

It’s almost treating raised capital like a 401k account – there to save your a** in the long run but not accessible day-to-day. It’s what HNIs do with trust funds – even with a large pool of capital, the kids still get drip-fed for their own good.

A similar spirit is reflected in grandma’s age-old wisdom that advises folks to minimize easily accessible funds in bank accounts and instead, lock them up in CDs. Adding that extra layer of friction itself acts as a nudge to avoid impulsive spending.

OG public market investors like Nick Sleep and Guy Spier have openly shared how they use behavioral nudges like keeping the Bloomberg terminal in an uncomfortable location or only placing Buy/Sell orders when the market is closed, to avoid unnecessary noise and the tendency to frequently trade at the expense of compounding returns.

This idea of drip-feeding immediately resonated with the founder and in fact, she encouraged me to blog about it. Hence this post! Am eager to see how the results of this execution nudge pan out. Will share the learnings on that soon.

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Cheetah in the Rainforest: 2021 Vintage of Venture

“A firm writing seed checks without specific competence in that stage is like a cheetah in the rainforest. The beast is a wonder of nature that can run at a top speed of 60-70 mph in the African grasslands. But place it in the Amazon rainforests, and all its wondrous capabilities will amount to zilch. It’s just not built for it!”

Most 2021 vintage startups got VC ‘cheetahs’ on their ‘rainforest’ Boards. Surviving the new reality that faces them, will require a cathartic reboot.

Had an interesting conversation with a Bay Area-based founder a few weeks back. His startup is in the high-ACV enterprise space wherein the product is solving an intense and wide-ranging problem that is especially applicable to large companies. He got off the blocks in 2021 with a mid-single digit $Mn pre-seed round by a top-tier VC at the idea stage itself. A start that most founders dream of!

However, now two years down the road, the situation on the company’s Board is far from rosy. The company has gone through tumultuous times that are typical for any 0-to-1 startup. While the founder has kept his chin up during this phase, he is very disillusioned with the VC’s advice, behavior & general stance so far. When he shared some specific examples of this with me, my first reaction above all else was that this firm clearly has little past experience of portfolio management at the seed stage & in particular, what founders need in order to navigate its inherent complexity.

As I started relating this to many other founders I have met this year, a pattern is clearly emerging in the 2021 vintage of startups. Specialist VCs who have mainly invested in the Series A & beyond space in the past, went upstream & wrote massive pre-seed & seed checks with minimal or no traction. They were probably under pressure to deploy or get early dibs on the best teams as later stage valuations were going to stratospheric levels.

Seeing these companies now, after most of them have almost consumed their 24-month runway, I am seeing how the lack of milestone-based capital sequencing & strong stage-firm fit has created many fundamental issues with their core:

1/ Armed with big checks from large AUM firms, founders ignored the scrappy, capital-efficient approach right out of the gate. Instead, they bulked up teams & spent disproportionately on go-to-market even before problem-solution fit. Now in hindsight, they have ended up creating fragile organizations that are at the mercy of the macroeconomy & availability of follow-on capital.

2/ Many of these VC firms have put relatively inexperienced team members on the boards of these companies. My guess is because in their overall AUM game, these types of really early investments are probably considered highly risky “option bets” with low stakes in general & therefore, good learning opportunities for more junior members.

While experience by itself doesn’t make anyone a good or bad VC, pre-seed & seed stages of venture capital demand much more art & judgment in company building from all stakeholders. A firm writing seed checks without specific competence in that stage is like a cheetah in the rainforest. The beast is a wonder of nature that can run at a top speed of 60-70 mph in the African grasslands. But place it in the Amazon rainforests, and all its wondrous capabilities will amount to zilch. It’s just not built for it!

It’s a bit counter-intuitive but in my view, the best VC talent (best = strong fit from a personality & skills perspective) needs to be involved in the earliest stages of company building. There is a reason why YC has a strong moat in that stage, & why while most fresh MBAs can invest & do portfolio management at Series A & growth funds, pre-seed & seed needs artists like Paul Graham & Semil Shah that are few & far between.

One of the things I would like to see coming back into the startup ecosystem foundation post this venture downturn is the importance of “capital staging” – rigorously thinking through how the company should be capitalized at the earliest stages, what kind of investors should be assembled for it, the mindset, approach & time a specific company would need to iterate towards problem-solution fit & eventually, product-market-fit.

I would like to see the return of angels, domain operators & specialist boutique VCs partnering with founders at the earliest stages of venture. We need some version of the Arthur Rock & Ron Conway models but modified for this age. These types of stakeholders in turn, would educate and/ or encourage founders to be scrappy, agile and perseverant during the 0-to-1 stage, supporting them in building the most optimal path to the next base camp.

Closing thoughts specifically for the 2021 vintage startups – while it’s not easy to rewire the foundational DNA of a company, it’s not impossible. While the lesser gritty teams will flame out, I am also seeing founders who are acknowledging both the mistakes of the past as well as the new reality that faces them and are determined to learn & re-invent themselves. Even though as an investor, I am not too excited about the 2021 vintage the way it looks & is behaving right now, I will be more than eager (& rightly so!) to back its re-invented & re-wired v2.0.

Learnings from 100s of YC companies

Heard an excellent conversation between Michael Seibel (CEO of YC) and Patrick O’Shaughnessy (top asset manager, also moonlighting as an amazing podcaster). It had many fundamental insights that would help any founder♟ Sharing my top takeaways here:

#1 Don’t be too “smart” for your own good: there is nothing like that one breakthrough idea that is guaranteed to work 100%. Teams need to be willing to iterate, pivot & execute in new directions all the time 🛶

#2 Launch!!! At the 0-to-1 stage, the most important thing is the ability of a team to build & launch a working product, as fast as possible. You can’t build a company if you don’t launch in the first place 🚀

#3 Startups are all about momentum: teams need to demonstrate forward momentum in whatever time they have spent building the product. The best teams generate rapid momentum to acquire users & fundraise with this tailwind 🏎

#4 What kind of problem is worth solving? a) high frequency⏰, b) high intensity🔦, c) high willingness to pay💵. Overall, founders need to have some special insight into the problem they are setting out to solve💡

#5 Founders essentially take 2 kinds of risk: a) product risk🛠, not sure if people need this product (typically taken by relatively younger founders) and b) execution risk🔨, I know this product is needed but not sure of execution (usually taken by more experienced founders).

#6 Be “real” when coaching founders: be upfront in presenting facts about high failure rates. And that to win, you have to reach out for extraordinary (be 2 standard deviations from average). Also, emphasize the importance of developing tools to manage their emotions & health⚖️

#7 Best way to create leverage during your fundraising process? Acquire users & grow m-o-m. Pitch with real users & data. It’s possible to raise money just on ideas/prototypes, but you will have zero leverage in these discussions. Your goal should be to fundraise with leverage💪🏼

#8 What is Product-Market Fit? It’s like a sledgehammer to your jaw. It’s that month or quarter where you get so many users that it breaks your systems. When the sheer market traction bypasses all your spreadsheet plans & projections. When you have PMF, you WILL know it🚰

To conclude, what I found most intriguing was the importance of “bravery” in founders🧗🏽‍♀️ 2020 has shoved in our faces a plethora of issues we are facing as a species. The need of the hour is a generation of founders that take on problems that are intimidating to solve⭐️

Note: this post first appeared on the Workomo blog here.

A decade of YC learnings on what not to do

Recently saw an amazing SaaStr talk by Michael Seibel (YC Partner) on a decade of learnings from YC (or to put it in another way, top mistakes startups make post demo day). These have been framed as learnings mainly for the post-seed stage (once a company has raised $1–2Mn), but in my view, are broadly applicable to any startup. As we close out 2019, I thought I will recap the top 10 highlights from this talk, just so all of us have this sober perspective heading into 2020.

Assuming that just because you have raised a seed round, you have achieved PMF — “Don’t let investors convince you that you are further along than you actually are.”
Hiring too quickly — per Michael, the standard startup model is, post a ~$1Mn seed round, grow to 8–10 people. Once this happens, the primary job of a CEO becomes “management” whereas it should be driving the company to PMF. Side notes (2a) Trying to take on too many problems or products at the same time. (2b) You want employees who are excited to drive the company to PMF, and not be under the impression that they are joining a company that already has PMF. (2c) An early stage, pre-PMF company should be minimizing # of non-essential employees. (2d) If an employee isn’t becoming an essential employee in first 3 months, it’s unlikely they will ever become one.
Not understanding their business model — “not just pursuing the business model strategy that interests you, but one that is commensurate with what your product needs.”
Not understanding what’s the right time to sell your product to founders/ tech startups as early customers — there are both pros and cons of this strategy. It really depends on what you are selling.
Assuming investors will be a large differentiator — “An A grade investor is someone who signs the paperwork, wires the money on time, and then doesn’t bother you.”
Not establishing best practices around hiring — “do simple things like setting up an intelligent interview process that candidates will enjoy going through, having an open communication process around equity & clearly talking about the candidate’s roles & responsibilities.”
Not establishing best practices around management — “eg. consistent 1:1 meetings between employees and managers, some type of all-hands meeting, getting employee buy-in on direction & strategy.”
Not clearly defining roles & responsibilities between founders — “avoid each startup decision going into a founder committee for resolution.”
Not having level 3 conversations within founding teams to resolve conflict — creating an environment of resolution, not attacking. Not bottling-up conflict issues.
Assuming Series A will be as easy to raise as an angel round — “important to get into Series A discussions with adequate leverage”. Side notes (10a) Don’t get impacted by TechCrunch articles on some Joe raising a $10Mn round for a business that will clearly fail. You don’t know the background circumstances behind that deal. (10b) People who had trouble raising money in their 20s, were finding it significantly easier to raise money in their 30s — this is because 1) investors are considerably more inclined to invest in 2nd-time founders, and 2) if you have been in the Bay Area for 10 years, you are most likely pitching people you already know.

Closing thought: as per Michael, the struggle with most companies is not that their thesis was off. It’s that either their timing was off OR they couldn’t iterate enough on the product to get to the solution that actually solves the problem statement. So, if you keep the team small, iterate quickly and ignore the hype, you can actually spend the time required to solve the problem. You might end up taking 1 yr or 3 yrs to get to PMF — stay lean till then and go to Series A once you have PMF, which gives you significant leverage.

PS: I loved this final quote from him — “In the startup journey, be prepared that both good times and bad times will feel bad.”

Tag: Ycombinator