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Dalton + MichaelDalton + Michael

Building A Big Company: Non-Obvious Insights

In this episode of Dalton + Michael, the two discuss the risk a startup faces when: 1) it successfully made something people want but 2) the startup is at risk of hitting a "local maximum." To build a huge company a startup often needs to change direction/strategy *post* product-market fit. D+M discuss some examples of companies that executed on strategy changes post-PMF including Facebook and DoorDash. Dalton + Michael is brought to you by ‪@Standard_Cap Dalton Caldwell on X: https://x.com/daltonc Michael Seibel on X: https://x.com/mwseibel

Dalton CaldwellhostMichael Seibelhost
Jan 19, 202622mWatch on YouTube ↗

EVERY SPOKEN WORD

  1. 0:00 – 0:32

    Why “we’re 10% of the winner” is usually a dangerous illusion

    1. DC

      There's another misconception that happens that le- leads people to believe being the seventh-best player is okay, which is, well, if the winner is generating 500 million in revenue and we're generating 50 million in revenue, we're just worth, like, one-tenth of the winner. I don't think I've ever seen this thought backed up in fact.

    2. MS

      I think that the assumption is you're gonna trend towards generating no revenue.

    3. DC

      Yes. [laughs]

    4. MS

      [laughs] [upbeat music]

  2. 0:32 – 1:20

    Pre-PMF advice vs post-PMF reality: why the guidance must change

    1. MS

      This is Dalton + Michael. Today what we're gonna talk about are some non-obvious insights we've had on how you actually make a very large company.

    2. DC

      I think what I'd like to explore is how maybe the advice that we give pre product-market fit is slightly different than the advice that we give post product-market fit. And I think sometimes founders-

    3. MS

      Yep

    4. DC

      ... uh, don't get this right. So-

    5. MS

      Yeah. So I think-

    6. DC

      Break it down

    7. MS

      ... to start with, uh, disclaimer.

    8. DC

      Yeah.

    9. MS

      This is a nuanced topic.

    10. DC

      [laughs]

    11. MS

      This is the... This is a fantastic example-

    12. DC

      Yes

    13. MS

      ... of something that I'm happy to speak about on video-

    14. DC

      Yes

    15. MS

      ... and would never in a million years put on X or social media.

    16. DC

      Yeah, yeah, yeah.

    17. MS

      Which nuance doesn't work.

    18. DC

      Yeah, yeah, yeah.

    19. MS

      Even, even writing blog posts, it had to be a very long-

    20. DC

      Yeah

    21. MS

      ... long post.

    22. DC

      This is tricky.

  3. 1:20 – 1:59

    Pre-PMF: avoid ‘midwit strategy’ and focus on users and product quality

    1. MS

      So this is super nuanced, and so the nuance here is pre PMF you just need an idea, and you just need to make something that people want. And so much of the advice is to stay out of midwit land.

    2. DC

      Yes.

    3. MS

      So much of the advice is-

    4. DC

      Yes

    5. MS

      ... to quiet your mind-

    6. DC

      Yes

    7. MS

      ... from all the distractions-

    8. DC

      Yes

    9. MS

      ... all the-

    10. DC

      Yes

    11. MS

      ... you know, super fancy-

    12. DC

      Yes

    13. MS

      ... strategizing you think you're doing-

    14. DC

      Yes

    15. MS

      ... and just, like, go do the thing.

    16. DC

      Yes.

    17. MS

      And that's how I would summarize lots and lots of the pre PMF advice, is just go do the thing.

    18. DC

      Less strategy, more help the customer.

    19. MS

      More just do things.

    20. DC

      Yeah.

    21. MS

      [laughs] Right? And those people win. Again, here comes the nuance.

    22. DC

      Uh-oh.

  4. 1:59 – 3:02

    Post-PMF: the ‘local maxima’ trap and the myth of automatic scaling

    1. MS

      What we will totally acknowledge is that post PMF, if all you do is that same pre PMF strategy, you can end up in a local maxima.

    2. DC

      Yes. More common-

    3. MS

      [laughs]

    4. DC

      ... than I ever thought, and I think that there is this false belief that if I can make $10 million, I can make $100 million, I can make $500 million. And actually it u- often starts at $1 million.

    5. MS

      Yep. The thing that makes me $1 million can make me a billion dollars.

    6. DC

      What's unfortunate is how easy it is to verify that's not true.

    7. MS

      [laughs]

    8. DC

      Like, what's unfortunate is you can look at a lot of software companies and ask what did they do to make their first million, and is that how they're making all their money now-

    9. MS

      Yep

    10. DC

      ... and for just as many examples as you would find in the positive, you'd find in the negative.

    11. MS

      Like Google monetizing search, monetizing search. Microsoft?

    12. DC

      Yeah.

    13. MS

      Completely different.

    14. DC

      [laughs]

    15. MS

      Completely different. Get into the nuance here.

  5. 3:02 – 5:25

    Facebook as a case study in non-incremental, company-betting moves

    1. DC

      Yeah. I think the way I, I would set up this is to say let's use the Facebook example.

    2. MS

      Yes.

    3. DC

      I like to use them just 'cause it's now, everyone knows it's a big company.

    4. MS

      Yes.

    5. DC

      But remember when it was not a big company.

    6. MS

      Yes.

    7. DC

      And at the time when it was a small startup, it had the best social network for college students.

    8. MS

      Yes.

    9. DC

      And it basically had a monopoly for people that had a .edu email address.

    10. MS

      Yes.

    11. DC

      And at the time, you had to be a student at one of the universities that they supported.

    12. MS

      Yep.

    13. DC

      Otherwise, you couldn't use it.

    14. MS

      Nope.

    15. DC

      And that's part of what made it cool was there were no parents on it. There were no kids on it.

    16. MS

      It was a feature.

    17. DC

      It was a feature that was super unique.

    18. MS

      It was a feature.

    19. DC

      It also restricted you to only your university.

    20. MS

      Yes.

    21. DC

      And so they built this super sticky product, but at the time, the conventional wisdom is this is some college kid niche social network.

    22. MS

      How can that be big business?

    23. DC

      How can that be a big business?

    24. MS

      Yeah.

    25. DC

      This is by its very definition niche.

    26. MS

      Yes.

    27. DC

      And then if we look back in time, the strategic decision that was not hill climbing, was not, you know, hitting a local maxima, was to first allow high school students to come in.

    28. MS

      No. First it was the... It was first the companies that a lot of the Ivy League kids went to work at.

    29. DC

      That's before high school kids?

    30. MS

      That was before high school kids.

  6. 5:25 – 5:43

    Why other social networks didn’t win: strategy choices (and outcomes) differ

    1. DC

      But remember back in 2005, 2006, there were a bunch of VC-funded social networks.

    2. MS

      Yes.

    3. DC

      i5.

    4. MS

      Yep.

    5. DC

      Tagged.

    6. MS

      Yep.

    7. DC

      And for whatever reason, those companies didn't make these types of moves. Or to the extent they made strategic moves, those moves did not work out.

  7. 5:43 – 6:13

    Business-model reality: advertising rewards ‘one place everyone is’

    1. MS

      A takeaway from this story is if you're going to build a very, very large and successful social network, probably the best way to monetize it is through advertising. You have to figure out how to be huge, and there are a lot of other network effects that come in being huge. But if we just look at the business perspective, right, the value to an advertiser for everyone being in one place and the amount of premium you can chargeMassive. You don't get that value if you're the

  8. 6:13 – 7:35

    Fundraising milestones vs IPO-scale thinking—and why bundling decisions matter

    1. MS

      seventh place player. I'm sure there are a lot of other product reasons why this whole path made a lot of sense, but the business reason effectively enabled to make Facebook to make the amount of revenue it does. And I think that sometimes when we're talking to startups, I get the impression they care far more about what they believe their next fundraising milestone is than what number they'd have to hit to IPO, what number they'd have to hit to be a $50 billion valuation company in the public market, what company they'd have to hit to be $100 billion. And sometimes you are inadvertently making choices that reduce your chances of actually building a valuable company. One of the areas that we see this a lot are companies that kind of have to bundle.

    2. DC

      Yeah.

    3. MS

      So look at HRISs, right? And it's just like whatever reason-

    4. DC

      'Cause why would you wanna buy 17 pieces of HR software, right? [laughs]

    5. MS

      [laughs] Like the market wants bundles, and we see companies all the time, like, build a best-in-class product and then struggle with, do I do more? Do I bundle?

    6. DC

      Yeah.

    7. MS

      Hell, we're seeing this with bigger players now, right? If you're Zoom, if you're Slack, right, you have these decisions, like, we got to a certain size. Do we build the bundle?

    8. DC

      Yep.

    9. MS

      If we don't, can we really-

    10. DC

      Well, remember, Slack-

    11. MS

      ... grow the next level?

    12. DC

      ... is Salesforce now. They got acquired. [laughs]

    13. MS

      Well-

    14. DC

      So it's part of a bundle.

    15. MS

      Yeah. [laughs]

    16. DC

      Another bundle. Yeah, yeah, exactly, right?

  9. 7:35 – 8:29

    A concrete framework: what to do pre-PMF vs when you’re the 7th competitor post-PMF

    1. MS

      These are conversations that we never wanna have with a pre-product-market-fit company, right?

    2. DC

      Yeah. If, if- [laughs]

    3. MS

      [laughs]

    4. DC

      Again, let's, let's use a specific example. Let's say someone wants to build a new Cursor competitor.

    5. MS

      Yes.

    6. DC

      Pre-PMF, it's like, well, have you talked to your users?

    7. MS

      Yeah.

    8. DC

      Like, does anyone want this?

    9. MS

      Yes.

    10. DC

      Is this better than Cursor?

    11. MS

      Yes.

    12. DC

      Like, it's just the fundamentals. Any midway strategizing about whatever is irrelevant if you have no users.

    13. MS

      If your product is worse than Cursor-

    14. DC

      If it's bad

    15. MS

      ... then nobody [laughs] uses-

    16. DC

      Like, if no one will use it-

    17. MS

      [laughs]

    18. DC

      ... you have a problem.

    19. MS

      Yes.

    20. DC

      You know, if Claude Code is just way better, you're-

    21. MS

      Game over.

    22. DC

      Game over.

    23. MS

      Yes.

    24. DC

      But if you were sitting here right now and watching this video, and you had raised a bunch of money or a Series A-

    25. MS

      Mm-hmm

    26. DC

      ... and you were the seventh most popular-

    27. MS

      Mm

    28. DC

      ... Cursor or Claude Code competitor, and you've done no strategic thinking-

    29. MS

      Yeah

    30. DC

      ... about what the plan is-

  10. 8:29 – 10:00

    The harsh math of being #6/#7: revenue doesn’t scale linearly with rank

    1. MS

      Yes. And I think that there's another misconception that happens that le- leads people to believe being the seventh best player is okay, which is, well, if the winner is generating 500 million in revenue, and we're generating 50 million in revenue, we're just worth, like, one-tenth of the winner. And I don't think I've ever seen this thought backed up in fact. I think that the assumption is you're gonna trend towards being, generating no revenue.

    2. DC

      Yes. [laughs]

    3. MS

      [laughs] And I guess there are some markets where there's six winners, but eh.

    4. DC

      [laughs]

    5. MS

      And so what's interesting is in your example, right, if you're the sixth best player, like, you must be obsessed about winning the whole game.

    6. DC

      Or just having a move. There's gotta be a move.

    7. MS

      Or, yeah, or playing a different game.

    8. DC

      Yeah.

    9. MS

      Yeah. We can win that one. And we, I think we encounter a lot of YC founders who, um, and a lot of founders in general, who are kind of like, "But isn't 50 million in revenue sufficient? Like, haven't I won?"

    10. DC

      Yeah.

    11. MS

      Like, "Isn't the finish line behind me? Like, I got here. If I got to 50, it's a guarantee I'm gonna get to 500, right?" One of the things I say to a lot of founders is, "What do you think is the failure rate for a Series B company?" Because, like, I think in their minds, before I ask the question, they think every Series B company wins. [laughs] And then after I ask it, they're like, "I guess mathematically that wouldn't work." [laughs]

    12. DC

      Yeah. So-

    13. MS

      Not everyone wins. When they hear stuff like, ah, 80, 90%, they're like, "Oh."

  11. 10:00 – 11:27

    Why strategic thinking is ‘poison’ pre-PMF but essential after you know the customer

    1. DC

      Well, what's funny about this nuanced point we're making is I could see a lot of people being like, "Yeah, totally guys, I agree with you, but why aren't you doing all that during the batch?" Again, I, I don't think people recognize-

    2. MS

      No

    3. DC

      ... how this style of thinking-

    4. MS

      No

    5. DC

      ... is literally poison when you're trying to just ship a product, but is absolutely necessary in the pre-product-

    6. MS

      Well, I'd often attack it in this way. I think most of the time in your pre-product-market fit, you're still trying to learn what the customer wants. I would almost argue you're still in the fundamental kind of let me learn what the hell's going on. I think that, like, when you're trying to make these high strategic moves, it's very helpful that you know some stuff. [laughs] It's very helpful that you have a mental model of the customer, you have a mental model of their needs, you have a mental model of why your product helps them or not. Like, and these are things that you're still playing with pre-product-market fit. This kind of thinking creates paralysis in a pre-product market.

    7. DC

      Yes.

    8. MS

      Like, you know, instead of writing code today and talking to users, let's spend eight hours talking about strategy, right? Like [laughs]

    9. DC

      Well, again, to go back to the Facebook example-

    10. MS

      [laughs]

    11. DC

      ... all of the strategic work Zuckerberg did was super helpful with a guy with 100 million MAU.

    12. MS

      [laughs] Yeah.

    13. DC

      Like, it's like, cool man, you-

    14. MS

      Yeah.

    15. DC

      Here are the keys. You get to-

    16. MS

      Yeah

    17. DC

      ... spend a lot of time pontificating.

    18. MS

      Yes.

    19. DC

      I mean, some, some guy-

    20. MS

      Yeah

    21. DC

      ... sitting in his, an apartment strategizing about the future of social networking.

    22. MS

      Yeah.

    23. DC

      That, that's not someone in a good position-

    24. MS

      No

    25. DC

      ... to do this type of analysis.

    26. MS

      When Zuck's got 2,000 Harvard kids, that's not the time.

    27. DC

      Yeah.

  12. 11:27 – 13:41

    Using comps correctly: stop benchmarking to ‘potential’ and study proven winners

    1. MS

      Yeah. I love the point you made in the beginning, which is that, like, this gives us a little bit more time to flesh these ideas out. I think another idea that you introduced to me, which is I think is a basic finance idea that I didn't fully embrace at first, is just comps. The number of times I'm talking to founders, and I'm just like, "What company do you comp yourself to?" 'Cause if you're trying to think strategically, like what, what does good look like? Where are we aiming for? And the number of times people will be like, "Oh, well, this company has a billion-dollar valuation. I'm comping myself to them." And I'm like, I, I always laugh now 'cause I'm like, you have a sea of public startups that you could... It's like, you know-I don't wanna learn anything about playing basketball from Michael Jordan because I like this guy who plays on Duke right now.

    2. DC

      [laughs]

    3. MS

      And I'm like, "All right, good. I like the Duke guy. He's great. Like, maybe he'll make the NBA. Like, can we talk about Michael Jordan for a sec?"

    4. DC

      [laughs]

    5. MS

      And he's like, "Oh, but Michael Jordan's old." And I'm like, "But he won. Go pick a newer winner. Let's talk about LeBron James. Can we just talk about someone who's really put points on the board, and we're not judging them on what they might accomplish in the future?"

    6. DC

      But founders resist this.

    7. MS

      I, I-

    8. DC

      Like, those parts are very cool Part of it, or at least in my own experience, is it seems so foreign to go public or to know anyone that did. It just felt like being like, let's talk about the astronaut who walked on the moon. It just didn't seem real.

    9. MS

      There.

    10. DC

      Whereas now it seems completely real, but we're in the bubble, man. So again, I, I think, I think that's my steel man on why people-

    11. MS

      I hear that.

    12. DC

      Go ahead.

    13. MS

      But I think, you know, it's funny, we've gotten to do a number of YC talks with Tony from DoorDash, and, like, I think he was thinking earlier than anyone ever believed that, like, "I wanna do delivery better than Amazon."

    14. DC

      Before he ever had the right to-

    15. MS

      Yeah

    16. DC

      ... you know, [chuckles] the privilege to think that way, I think he was thinking that way, and that's just a choice, right?

    17. MS

      Yeah.

    18. DC

      Like, he could have only comped himself to Uber and Postmates.

    19. MS

      Yeah. You choose who your heroes are.

    20. DC

      Yeah.

  13. 13:41 – 17:09

    When ‘what if Google builds it?’ becomes real: competing with bundlers and giants

    1. MS

      And I also think it's more exciting, like, it's scarier for sure, but it's more exciting to compete against the big, big, big players. All right, last dangerous topic. So I, I love, I love talking about this. So during early-stage fundraising, we often make fun of investors who say, "What are you gonna do when Google builds your thing?" It's often a sign of a unsophisticated investor.

    2. DC

      I think it's because we heard that so much when we were founders.

    3. MS

      Yes.

    4. DC

      Well, also, there's no right answer.

    5. MS

      It's... Yeah, yeah. It's like, yes, if, if Mark decides to directly compete with you and ignore everything else-

    6. DC

      Yeah

    7. MS

      ... how would you win? [laughs] It's like, it almost feels like an unfair question. But there is a stage of company where the Googles, the Amazons, the Salesforces, the, the Microsofts will take interest. I heard a great story from a YC company doing a CRM, and he was like, "Have you ever heard of Microsoft Dynamics?" I was like, "I don't know about random Microsoft products." He's like, "Oh yeah, it's their CRM that's taking, like, customers out of Salesforce's hands left and right." And I'm sitting here like, how many of our founders think Salesforce is one?

    8. DC

      Yeah.

    9. MS

      And Microsoft's like, "Oh, this is around the time, you know, in the last five years. Let's, let's start [both laughing] We could do that." Or, you know, on a, on a classic example, right, AWS.

    10. DC

      Yeah.

    11. MS

      Damn near a decade they were the only serious player.

    12. DC

      Yep.

    13. MS

      And Google, and then Microsoft's like, "Oh, yeah, we could do that." And, like, the crazy thing is, like, we can hire some of the people who built your thing-

    14. DC

      For sure

    15. MS

      ... and ask them, "Hey, now that you've built it, how would you do it better the next time?" And so what seems like a dumb question from an early-stage founder, how should a later-stage founder think about these big guys, 'cause they do compete.

    16. DC

      I think it's worth thinking about from your customer's perspective. You know, just go through the laundry list. How hard would it be for someone to switch? Are there non-obvious reasons that they wouldn't wanna switch? I, I think just being really honest with yourself about those things, um, is probably a good idea. Like, in the case of Slack, I think what I heard, again, this is not first party, this is just third party, I think a lot more people, uh, were willing to use Teams and other stuff than Slack.

    17. MS

      Mm-hmm.

    18. DC

      And so it was not as sticky as they had hoped, which is part of why they needed to get acquired, I believe, that Microsoft actually did damage to Slack, and that's why they got acquired, was my understanding.

    19. MS

      It's funny. So I talked to somebody who was, like, a product lead at Microsoft, and he was just like, "Look, like, we could bundle Teams, and, like, we could effectively almost default roll it out to all Microsoft folks, where every one of those deals, Zoom would have to get people to adopt it, upsell them, figure out some IT thing, do all the contracting." And Mark's telling me just like, "This is the next product in the suite."

    20. DC

      Yeah.

    21. MS

      A question that is completely irrelevant to most YC founders for their whole career is if you're a product like Slack with the amount of kind of takeoff that you had, or Zoom with the amount of takeoff that you had, was there a way to compete against Office? And, like, one of the things I often think about is, like, there is a point where you might actually have to go at these big guys' throats.

  14. 17:09 – 22:10

    Big companies are vulnerable: Google+ failed, Amazon quality declined, DoorDash found an edge

    1. DC

      I mean, okay, one more time to go, go back to the Facebook thing.

    2. MS

      Yeah.

    3. DC

      Google decided to kill Facebook with Google+.

    4. MS

      Yep.

    5. DC

      And they put, like, half the company on it.

    6. MS

      Yep.

    7. DC

      And it totally failed, but it's not 'cause they didn't try.

    8. MS

      Nope. Nope. [laughs]

    9. DC

      It was not...

    10. MS

      No.

    11. DC

      There was a very serious effort-

    12. MS

      Yes

    13. DC

      ... by Google to bury Facebook.

    14. MS

      Yeah.

    15. DC

      It just didn't work out.

    16. MS

      It's funny 'cause it's kinda like, I don't know, I think about the ocean and just different sized fish, and, like, when you're a fish this small, you know, nobody-

    17. DC

      Yeah

    18. MS

      ... the great white doesn't care. But y- as you get bigger, [laughs] you've got bigger competitors, and I think that I almost wish that more founders thought of that as empowering. I thought of more founders like, "Hey, now I get to competing against the big guys," 'cause it's not like the big guys have the better product often than not.

    19. DC

      Yeah.

    20. MS

      Right? Like, you... Like, often by competing against the big guys, you can bing, bring a better product to market, and, like, I'll use DoorDash as an example. I've been an Amazon user for 25 years, and I would've said I've loved Amazon top five products in my life.

    21. DC

      Hmm.

    22. MS

      For maybe 20 of them. And something started happening about five years ago where I would do an Amazon search-

    23. DC

      I know, yeah

    24. MS

      ... and it's like, it's-

    25. DC

      It's, it's hard-

    26. MS

      [laughs]

    27. DC

      ... not to buy junk.

    28. MS

      [laughs] Yes. And I'm like-

    29. DC

      You have to really try to not buy trash on Amazon. Like, the whole thing is set up to buy trash.

    30. MS

      Click the right button, yes. [laughs]

Episode duration: 22:11

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