Save Your Startup During an Economic Downturn

1. 0:00 – 0:23

   Introduction

   1. MSMichael Seibel0:00

      I remember we had this meeting, um, with a lot of our employees, and we were like, "Look, we got three options. We can die in two months, we can try to get to break even, or we can try to get this thing profitable." [upbeat music] Hello, this is Michael Seibel with Dalton Caldwell, and today we're gonna talk about whether

2. 0:23 – 2:14

   Default alive or default dead

   1. MSMichael Seibel0:23

      your startup is default alive or default dead. So this was a concept that was actually invented by one of the co-founders of YC, Paul Graham. Dalton, do you just wanna start by explaining what this means?

   2. DCDalton Caldwell0:38

      Yeah, I mean, so to start with, you should read his blog post. It is excellent. It is short. It is easy to read. And so you should read it. But let me try to give you my crash course in it. Here's, here's what he means by default alive, default dead. As founders, we, we like to ignore the truth a lot of the time. [chuckles] And one of those truths are, is my startup going to go out of business? Right? You, uh... It's kind of an awkward thing to talk about, you know. And you don't wanna bl- bring that up in polite company. And so the point of default alive, default dead is it forces you to be honest with yourself. If I don't raise any more money, am I gonna die? Am I out of business? Or am I gonna make it? And default alive is different than profitable. Profitable means today I make enough money that I am profitable. My bank account grows every month. You still with me? Default alive means I may be burning money today, but my growth rate is high enough on revenue that I will become profitable before my bank account goes to zero. Does that make sense? And so if not a single other dollar of investor money comes into the business, my growth rate is high enough such that I don't have to lose sleep that I'm gonna have to raise a round before I die. And his point is this is a binary. Either you are default alive or you are not default alive, thus default dead. There's no third option here, friends. [chuckles] It forces you to pin yourself down in your own mind, right? Does that sound right to you, Michael? Did I get that right?

   3. MSMichael Seibel2:12

      You nailed it. And, and what's

3. 2:14 – 2:59

   The calculator

   1. MSMichael Seibel2:14

      interesting is that another YC co-founder, Trevor Blackwell, basically made a calculator that allows you to calculate this, 'cause, you know, I would argue it's easy to calculate, but it's just nice to have a tool there where you can just input some numbers, and we'll make sure that's linked, too, as well. So I think that with this concept of default dead or default alive, what's so weird is how obvious it is. Like, it's weirdly the kinda concept that, like, the entrepreneur who runs a barber shop will understand before a startup founder will, right [laughs] ? It's like, it's, it's so logical. What do you think are some of the reasons why founders have a hard time understanding this is important math to do? Like, what, what's,

4. 2:59 – 7:32

   Founder's distraction - Fundraising game

   1. MSMichael Seibel2:59

      what, what's distracting them from this truth?

   2. DCDalton Caldwell3:01

      I think the context is that if you've raised some money, say you're a YC company, you raised money at Demo Day, the belief that you'll be able to raise more money, uh, y- it's hard to not take that for granted. And you're like, "Yeah, yeah, yeah." But, but really, once you've started raising money, you get hooked on it, you know. Like, you get hooked on the juice, okay? And so the idea that maybe you won't be able to raise the next round or that it'll go harder than you want, to say that out loud is almost a showing... Like, it's like you're not confident enough. Like, I think you, I think it's awkward to speak of these things with your co-founders or with whoever because it's almost like, well, of course you can raise the next round. Like, of cou- Like, we're gonna make it. And so I think it's that, man. I think, I think, again, we both have been founders. I don't think you wanna say this stuff out loud too much. It makes it sound like you're worried or scared, and you certainly would not want to admit this to your investors.

   3. MSMichael Seibel3:57

      Well, I think that here's the tricky bit in my mind. Not only is it that, this idea of like, well, if we question our ability to raise the next round, are we not confident or are we gonna psych some people out on our team and make them not wanna work here? It's that plus raising the next round's harder. So you kinda get screwed both ways. Like, like, I think oftentimes fou- founders believe that raising the next round's gonna be like the last round, even though they kind of understand that the next round, there's a smaller pool of people who can do it. They're investing more money. [chuckles] So, so logically it should be harder, right? Like, mathematically, there are fewer series As than seed rounds and fewer series Bs [chuckles] than series As, right? And so, but I don't think they internalize that. And, and one of the things you talk about a lot in the YC batch is this idea that startups are a series of mini-games, and the mini-games change and get harder. I think people weirdly think that this fundraising mini-game doesn't change, when of course it does [chuckles] . Like, of course.

   4. DCDalton Caldwell5:04

      And sometimes it's easier. When you have a great product and great design, sometimes your next round is far easier, to be clear.

   5. MSMichael Seibel5:11

      Yes.

   6. DCDalton Caldwell5:11

      We're not saying it's always harder. But, and here's the big but, it's a moving target.

   7. MSMichael Seibel5:18

      Yes.

   8. DCDalton Caldwell5:18

      And there's this thing called the economy.

   9. MSMichael Seibel5:20

      [laughs] Yeah.

   10. DCDalton Caldwell5:21

       And there's this thing called, like, investors-

   11. MSMichael Seibel5:23

       Yes

   12. DCDalton Caldwell5:23

       ... who are people that are not within your control.

   13. MSMichael Seibel5:26

       Yes.

   14. DCDalton Caldwell5:26

       We don't know interest rates.

   15. MSMichael Seibel5:28

       Nope.

   16. DCDalton Caldwell5:28

       And so y- what you'll see is whenever there's, like, choppy waters, the default dead people that were banking on the next round being easy die. Simple as that.

   17. MSMichael Seibel5:39

       Game over.

   18. DCDalton Caldwell5:39

       And the, it's, and the companies that are default alive, when there's choppy waters, they live.

   19. MSMichael Seibel5:44

       And I think it's funny because I like your phrasing. We can't tell you whether it's gonna be harder or easier to raise your next round. We can just tell you it's probably gonna be different than the last one. [chuckles] So you should be planning for a wider range of possibilities than same as last time.

   20. DCDalton Caldwell6:01

       And I think about this in terms of margin of error. Like, last thing on this point.

   21. MSMichael Seibel6:04

       Yeah. Yes.

   22. DCDalton Caldwell6:04

       The margin of error when you're default alive is huge.

   23. MSMichael Seibel6:07

       Yes.

   24. DCDalton Caldwell6:07

       You can go out And try to raise a round and fail and be fine. There's huge margin for error. And what's funny, I, I always talk about this, imagine if TechCrunch wrote an article about every failed fundraise. It'd be-

   25. MSMichael Seibel6:23

       That's it

   26. DCDalton Caldwell6:23

       ... you know, we're only reading about the successful ones. There's lots of failed fundraises, friends.

   27. MSMichael Seibel6:27

       Yes.

   28. DCDalton Caldwell6:27

       Lots and lots and lots and lots of fun-

   29. MSMichael Seibel6:29

       The majority

   30. DCDalton Caldwell6:30

       ... failed fundraises.
5. 7:32 – 9:57

   Fundraising leverage

   1. MSMichael Seibel7:32

      we talk so much in The Batch about leverage when it comes to fundraising, and when I think about being default alive, there's, there's multiple levels of leverage. One is confidence, right? If you don't need a deal, man, you're gonna pitch better. Like, like this, that's the way life works. Like when you don't need something, you're way more convincing than when you're begging for something. Um, and then two, leverage being the investor knows you don't need them. So not only is your pitch better, right? The investor knows your business is stronger and knows there's gonna be more competition to invest in your business, and therefore is gonna be more likely to want to invest in your business. So you get like double leverage. Whereas on the flip side, if you run your business default dead, you take two leverage hits. Like when you really think deep down, especially like you said, when you're on low runway, you're like, "Shit, if I don't thread this needle on this fundraise, we're dead." A good investor can always tell [laughs] whether the company's pitching them is gonna die-

   2. DCDalton Caldwell8:32

      Yeah

   3. MSMichael Seibel8:32

      ... about to die or not.

   4. DCDalton Caldwell8:32

      Well, and even if you want to invest, you offer worse terms, or you put in-

   5. MSMichael Seibel8:37

      Yeah

   6. DCDalton Caldwell8:37

      ... sneaky, you know, there's all sorts of sneaky things-

   7. MSMichael Seibel8:41

      Ratchets and-

   8. DCDalton Caldwell8:41

      ... that investors can do.

   9. MSMichael Seibel8:42

      Yeah.

   10. DCDalton Caldwell8:42

       Yeah. Uh, not good stuff.

   11. MSMichael Seibel8:44

       And by the way, like I would argue that that's an investor being a good businessperson. If they have more leverage, they should get more positive terms. If you have more leverage, you should get more positive terms.

   12. DCDalton Caldwell8:55

       So Michael, why, why is this the thing that so many investors don't like us as YC partners telling YC founders? Why do they hate when we say this stuff out loud so much? They're allergic to this advice.

   13. MSMichael Seibel9:08

       You know-

   14. DCDalton Caldwell9:08

       Right?

   15. MSMichael Seibel9:08

       ... I think that in general investors are allergic when we tell founders that there might be situations where their incentives and the founder's incentives are not aligned perfectly.

   16. DCDalton Caldwell9:19

       It's, yeah, it's like a magic trick. We're like telling people how the magic trick is performed. It's like a faux pas. They don't like it. Why do they... They always tell us to shut up when we tell people this.

   17. MSMichael Seibel9:28

       They always tell, and there's like, uh, and, and I think it's also funny 'cause they also always tell us like, "Hey, like we're funding your companies. Like you shouldn't be like," you know, like-

   18. DCDalton Caldwell9:38

       Telling the founders-

   19. MSMichael Seibel9:39

       I-

   20. DCDalton Caldwell9:39

       ... not to have high burn?

   21. MSMichael Seibel9:40

       Yeah, exactly. Like, "I pat your back, you pat my back," [laughs] you know? Like, "We're all in this together." And it's like, yeah, but man, we gotta put those founders first. And I think that like the other thing that's really tricky, and we were talking about this earlier, is

6. 9:57 – 11:29

   Math are different

   1. MSMichael Seibel9:57

      that unfortunately founders get caught up with this math around default dead/default live because the math they use to pitch their company to investors is only a subset of the math they need to run their business, and I think this point is really tricky. Like when you're going in and pitching for a series A or a series B, m- so often, especially in a good economy, you're talking about top-line revenue. You're talking about new accounts that you've opened. You're talking about your month-over-month growth. And oftentimes you're talking about your head count, your hiring plan/the execs you've brought on, so on and so forth. Like the, that's the math that you're putting front and center. That's the math that investors, especially in good times, over-focus on. Whereas I'd argue when you're running your company, those numbers are important, but there's also your burn rate, your retention, how much your existing customer accounts are expanding, your revenue expansion over time. Those metrics are the ones that can better help you when you're trying to figure out how to make sure my company stays alive. And I think this is where things are tricky, is that in many ways investors are setting the agenda on what metrics are important for a company, and the investors are a little biased. Like they, they, they have, they have a, a, a point of view that might be not oriented around keeping the company alive. And you know, PG talked about this, right? What, what was PG's line on, on this stuff?

   2. DCDalton Caldwell11:26

      Yeah. Um, he calls this in

7. 11:29 – 15:37

   Kill or cure

   1. DCDalton Caldwell11:29

      a blog post kill or cure, where he just points out that a founder and investor have completely opposite incentives, where as an investor with a portfolio of companies, if you push them all to grow fast and some of them successfully grow really fast with a high burn and thread the needle and s- you know, become Uber or whatever, [laughs] and some of them completely explode, like fly the plane into the side of the mountain like fast, and there's lots more fasts out there, it actually makes sense from a portfolio theory to advise people to do this. Because either way, either it works great or it dies and goes away and you get to spend your time on something else. But like either way, it's explosive, right? It's explosive good, explosive bad.

   2. MSMichael Seibel12:17

      Well, and for a good fund, that time is the limiting factor, right? Not money.

   3. DCDalton Caldwell12:21

      Yeah. Y- And board seats, you're limited as a-

   4. MSMichael Seibel12:23

      Yeah

   5. DCDalton Caldwell12:23

      ... as a VC on how many boards you can sit on. And so you don't wanna sit... So, so basically, if you're a VC and you sit on a board of a company that takes forever to get big with, like, low burn, that's kind of boring and kind of bad for your career, and look, you look bad to your colleagues. Like, like there's all these dynamics that founders are not aware of. Um, that's not a good move to be on the several boards of companies doing just okay. Versus if you're a founder and you're choosing between do you want a zero-

   6. MSMichael Seibel12:57

      [laughs]

   7. DCDalton Caldwell12:59

      ... literally zero-

   8. MSMichael Seibel13:00

      Yeah

   9. DCDalton Caldwell13:00

      ... or do you wanna keep going and give yourself more time to figure out product market fit, and maybe you can figure out an exit and make life-changing money-

   10. MSMichael Seibel13:08

       Yep

   11. DCDalton Caldwell13:09

       ... that in, that to a VC doesn't matter at all. Like, man, that sure sounds like misaligned incentives, right, Michael? Like...

   12. MSMichael Seibel13:15

       Massively so. Sometimes the investor in this equation is kind of, is perceived by founders who haven't raised money yet as, like, demanding that the company grows or demanding that the company burns a lot of money, as if they were the boss, and I think this is a very bad misconception. Like, I don't, I think that's extremely rare for an investor to be demanding you to, like, burn like crazy. I think that the horrible truth is that founders don't need much of a push.

   13. DCDalton Caldwell13:46

       Oh, it's like, it's like how, Michael, are, I hear you're demanding people to raise at high valuations.

   14. MSMichael Seibel13:51

       [laughs]

   15. DCDalton Caldwell13:51

       That's the rumor I've heard.

   16. MSMichael Seibel13:52

       Yes. Exactly.

   17. DCDalton Caldwell13:54

       Are, aren't you demanding YC founders to-

   18. MSMichael Seibel13:56

       I am.

   19. DCDalton Caldwell13:56

       [laughs]

   20. MSMichael Seibel13:57

       I'm, I'm, I'm j- I'm, I'm twisting their arms to, to dilute less. It's, I'm so powerful. I think this is the tricky bit, is that, like, s- deep down inside, every founder wants permission to blitzscale.

   21. DCDalton Caldwell14:10

       And that they're special and that they're gonna build the next big one. And so if you talk to, you know, half a dozen people, and one of them's like, "Yeah, I don't know, maybe you should grow faster. I don't know. Maybe burn's not our biggest concern," like, that's actually the fly on the wall recording.

   22. MSMichael Seibel14:22

       [laughs]

   23. DCDalton Caldwell14:22

       I wish you could have a fly on the wall. It's like, "Yeah, you know, these numbers, I think you wanna get these up, but I don't know if burn's my biggest concern." And then the founder hears that, and they're like-

   24. MSMichael Seibel14:30

       Yes

   25. DCDalton Caldwell14:31

       ... "We're going."

   26. MSMichael Seibel14:32

       It's time. I knew it. [laughs] We're going.

   27. DCDalton Caldwell14:35

       What, what did Fast do? They raised 100 million, and they burned it in 10 months. They got into a 10 million a month burn. That's incredible. I'm, I'm actually super impressed. You have to really try.

   28. MSMichael Seibel14:47

       You'd have to be working pretty hard on it. We certainly need a lot of recruiters. Like, [laughs] like you gotta hire a lot of people. Like...

   29. DCDalton Caldwell14:55

       Yeah, 'cause, like, what, what else are they spending money on besides head count?

   30. MSMichael Seibel14:57

       There's no inventory. Like, if it was a hardware company, I'd understand, but there's no inventory. Like, and it's, it's... I assume they weren't getting offices. It was during COVID, right? So it's like, jeez.
8. 15:37 – 19:22

   The fatal pinch

   1. MSMichael Seibel15:37

      essay called The Fatal Pinch. I think it's so interesting because we see this in office hours so frequently. Like, it is so common that we will talk to a founder who's in the fatal pinch and doesn't realize it. And it's funny 'cause at the end of the batch, you tell everythi- everybody a very simple concept. It's basically stay lean until you have something, and then spend money on growing it. Yet founders inevitably get frustrated, get tired, get distracted, and somehow always come to the conclusion that spending more money allows product market fit to happen faster. And what's sad is that, like, probably, at least for me, more than 50% of the time, I don't get the office hour before the founders decide to ratchet up the spend. Right? It's-

   2. DCDalton Caldwell16:30

      Oh, yeah, it's always when it's too late. They're like-

   3. MSMichael Seibel16:32

      Yes. [laughs]

   4. DCDalton Caldwell16:32

      I always get the office hour when they're down to low runway, and they, they're like, "We're, we're dead. We're bleeding out, you know. Please, please help."

   5. MSMichael Seibel16:41

      And it's like, if you had talked to me six months earlier, we could have tied a tourniquet around your gaping leg wound, and you'd be alive. Hell, we could've saved the leg. What's tricky is that if you find yourself even suspecting you could be in this situation, like, you need to do this math as soon as humanly possible, right? Like, you're probably too late to do this math in all cases.

   6. DCDalton Caldwell17:07

      And no one wants to do it because it's too late, 'cause it's a buzzkill, man. No one... Like, who wants to be that guy? Everyone's gonna be mad at you. Your investors are gonna be like, "Oh, why are you bringing this stuff up? You need to focus on growth." Like, like, I didn't, you know. Like, people will give you a hard time to bring this stuff up until it's too late, and then everyone's like, "Why didn't you bring this up earlier?"

   7. MSMichael Seibel17:26

      To play devil's advocate, though, well, we have a bunch of great engineers at Dalton. We can always get acqu-hired, right?

   8. DCDalton Caldwell17:34

      Yeah. So we have the data here at YC, and I will not tell you that no acquisitions ever happen. But similarly, what I was saying earlier, where if you only read TechCrunch about the successful fundraises, it gives you a warped perspective on how common they g- are successful, and that most series A fundraises fail. Well, guess what? No one gets acquired effectively. Like, there's an asterisk next to no one. [laughs]

   9. MSMichael Seibel18:00

      [laughs]

   10. DCDalton Caldwell18:01

       But the, the, the companies, of the companies that attempt when they're low on runway, they're, they're, they flew the plane into the side of the, of the mountain. There's no acquisition coming, man. Like, I'm sorry. Like, maybe you could get lucky. Maybe you built a great team. Everyone says that. But again, like, to keep picking on the Fast thing, I think Affirm Paid them $0, I believe, to get all of their engineering talent. What would the incentive have been for a firm to pay any money for a company that's rapidly dying? There's no market for a company that's out of money, right? Anyone that's smart on the buy side knows that a company that is hemorrhaging cash will soon be bankrupt. Why would you wanna buy that problem? You're almost worth less than nothing because you often have legal liability. [laughs] And so no one wants to buy problems.

   11. MSMichael Seibel18:52

       And, and I think that that's so unfortunate because once again, if you're sitting at 12 or 18 months of runway, there's even flexibility on the acquisition front that doesn't exist when you're sitting at three to six months of runway. Like, y- you can do all, all of the moves that you can do to rescue your company require time. So let's talk about that. Let's talk about the moves.

9. 19:22 – 19:40

   Tough decisions when default dead

   1. MSMichael Seibel19:22

      What are some of the tough decisions that you might have to make if you find yourself default dead and you wanna change that? Let's go through the list of pain. Uh, what's number one, Nathan?

   2. DCDalton Caldwell19:38

      Well, for most folks, it's, it's, it's literally

10. 19:40 – 20:46

    Headcount

    1. DCDalton Caldwell19:40

       headcount. It's not office snacks. I'm sorry. [laughs] That's probably not the thing that's, you know ... Perks are not bankrupting the company. It's that you hired too many folks. People are expensive, and this is 80 per- like I, I've just seen so many people's, like, burn spreadsheets. You know, you have to ... That's always the thing. They wanna be like, "Well, but we're very cheap," or, "We're very..." You know, they wanna tell a story, but it, it's, it's people over-hiring is the thing.

    2. MSMichael Seibel20:09

       And I think it's sad because no one likes letting people go. No one likes, like, like, likes go- letting good people go, right? It's, it's horrible. The best founders, if they have to do this, will make sure that they get other jobs, will make sure that they, that they're well cared for.

    3. DCDalton Caldwell20:23

       Well, and the best thing is to never over-hire to begin with. Like, like honestly-

    4. MSMichael Seibel20:26

       That's the thing

    5. DCDalton Caldwell20:27

       ... the hack-

    6. MSMichael Seibel20:28

       Yes

    7. DCDalton Caldwell20:28

       ... the actual hack is to not over-hire.

    8. MSMichael Seibel20:30

       Yes.

    9. DCDalton Caldwell20:30

       'Cause once we start having the, "We over-hired, now what do we do?" conversation, let's not have that conversation. Like, that's, like-

    10. MSMichael Seibel20:36

        Exactly

    11. DCDalton Caldwell20:36

        ... too far. So the actual advice is don't s- make it a problem, and then you don't have to worry about how to fix it.

    12. MSMichael Seibel20:45

        Then number two

11. 20:46 – 22:50

    Ad Spend

    1. MSMichael Seibel20:46

       is ad spend. And, and man, we see this all the time. It's, "Well, we have this top line goal we need to hit."

    2. DCDalton Caldwell20:54

       80K MRR, right Michael? We need, we need to, we need to hit 80K MRR.

    3. MSMichael Seibel20:58

       We gotta hit it, and so we gotta spend this much money on ads. In fact, we have to spend more money on ads every month to, because we're growing-

    4. DCDalton Caldwell21:05

       To-

    5. MSMichael Seibel21:05

       ... to hit our growth goals

    6. DCDalton Caldwell21:06

       ... keep the growth going.

    7. MSMichael Seibel21:07

       Yeah. And unfortunately, the result of that is also that, like, our payback period for every customer that we're acquiring is either super long or long and growing. [laughs] So our ad dollars are getting more ineffective as we are scaling them up.

    8. DCDalton Caldwell21:28

       And we have to show growth, 'cause if we s- if we stop increasing our ad spend, basically if we stop steering the plane into the mountain-

    9. MSMichael Seibel21:36

       [laughs]

    10. DCDalton Caldwell21:36

        ... and putting the gas-

    11. MSMichael Seibel21:38

        Yeah. [laughs]

    12. DCDalton Caldwell21:38

        ... or like putting throttle in-

    13. MSMichael Seibel21:40

        Yes. [laughs]

    14. DCDalton Caldwell21:40

        ... if we don't do that, we won't raise. And so you'll talk to founders where they know the problem. They're like, "Yeah, yeah. We're, we're in trouble. We need a raise." And we're like, "Well, maybe don't ... Like, don't crash the plane-

    15. MSMichael Seibel21:52

        [laughs]

    16. DCDalton Caldwell21:52

        ... into the mountain." And they're like, "Yeah, yeah, but you don't get it. If we don't put the throttle into the side of the mountain, we won't be able to raise." And it's like these are the most frightening conversations.

    17. MSMichael Seibel22:03

        So bad.

    18. DCDalton Caldwell22:03

        And I think what they, and what they don't wanna do is take the L. Like, they don't wanna, they don't want to take the growth hit 'cause they, they ... The, the idea that maybe someone would fund them or maybe they could sell their company in some long shot scenario prevents them from not steering the company into the mountain, right?

    19. MSMichael Seibel22:24

        And I think this isn't talked about enough. Like, many successful companies have had to take L's along the way.

    20. DCDalton Caldwell22:31

        Oh, yeah.

    21. MSMichael Seibel22:32

        Like, learning how to take a punch is not a bad thing. [laughs] Like-

    22. DCDalton Caldwell22:36

        Losing face. No one cares. No one care- oh, you reduced your ad spend. Your growth evaporated. Eh. But you're around to live, to fight for another day. That's fine.

    23. MSMichael Seibel22:47

        And then the last one, and, and you brought this up in a previous conversation,

12. 22:50 – 25:16

    Raising prices

    1. MSMichael Seibel22:50

       is raising prices. It's like, wow, well, the thing that we're selling now, money, this thing we're selling a lot of right now, we lose money every time we sell it. Maybe we could increase prices so that we are break even, or we make a dollar every time we sell it. Oh, no. That means we're gonna sell it to fewer people. It's like, yes. [laughs]

    2. DCDalton Caldwell23:11

       So our plan is to sell a dollar for 99 cents, and it's going well. And we're like, "Well, have you considered not losing money on every transaction?" They're like, "Absolutely not."

    3. MSMichael Seibel23:22

       Well, and this is something-

    4. DCDalton Caldwell23:23

       "How dare you even suggest that?"

    5. MSMichael Seibel23:25

       You talk about this a lot. Like, I think it exercises a different muscle in your customer's brain when they know they're getting a deal, right? It's like, like, in some weird way, they're willing to use a product that's, like, they would never use in any other circumstance if they know they're getting a dollar worth of value for 75 cents. [laughs]

    6. DCDalton Caldwell23:46

       Well, and you see this in New York recently with, uh, the 10-minute delivery stuff. There was, like, eight of them, and you could go get free ... They all had coupons.

    7. MSMichael Seibel23:55

       Yes. [laughs]

    8. DCDalton Caldwell23:56

       So as a consumer, you could, like, get a lot of free stuff, and that was all VC subsidized.

    9. MSMichael Seibel24:02

       Every time that company is losing money, [laughs] and, and like every single time.

    10. DCDalton Caldwell24:07

        It's, it's a wealth transfer from investors to consumers. You got-

    11. MSMichael Seibel24:09

        Yeah.

    12. DCDalton Caldwell24:10

        I actually appreciate that, you know?

    13. MSMichael Seibel24:11

        Yeah.

    14. DCDalton Caldwell24:11

        Uh-

    15. MSMichael Seibel24:12

        It's a subsidy

    16. DCDalton Caldwell24:12

        ... and to be clear, some of these companies may make it. There may be one or two.

    17. MSMichael Seibel24:17

        Yes.

    18. DCDalton Caldwell24:17

        But my guess is the ones that make it are very, very, very smart about this stuff. I mean-

    19. MSMichael Seibel24:23

        Yes

    20. DCDalton Caldwell24:24

        DoorDash, who I guess we always talk about, but you know, they were good at numbers and they, they understood default to live, default dead, and they understood-

    21. MSMichael Seibel24:30

        Just burn

    22. DCDalton Caldwell24:31

        ... like very sophisticated.

    23. MSMichael Seibel24:33

        Yes.

    24. DCDalton Caldwell24:33

        And so even though they were pla- they were, they were flying the plane very close to the mountain. [laughs]

    25. MSMichael Seibel24:38

        Yes.

    26. DCDalton Caldwell24:39

        But they were also very aware of the mountain. They knew what they were doing. They were test pilots. Versus, "Hey, I don't know," like, "I, I read in TechCrunch that if the more I burn, the more I raise, so I guess let's..." Do you see the difference, folks? Like, doing high-risk things when you're sophisticated and you know the risks is gonna work out better for you than wishful thinking high-risk takers.

    27. MSMichael Seibel25:03

        Yes.

    28. DCDalton Caldwell25:03

        That never works.

    29. MSMichael Seibel25:05

        Not wishful. Yes. And so what's interesting here is this idea that, you know, I, I, I was thinking about this. Taking one of these hits, right? Taking

13. 25:16 – 26:28

    Personal bankruptcy - Taking a big hit to growth rate

    1. MSMichael Seibel25:16

       a big hit to your growth rate in order to get to default to live, it sounds a lot like bankruptcy. It kinda sounds a little bit like personal bankruptcy, where it's like you take a hit on your credit score to kinda clear your debts, and the benefit though is you clear your debt. Like, like you, you are now living sustainably as opposed to, um, unsustainably. Now, here's why it's better than bankruptcy. I think in a traditional bankruptcy it takes seven years for your credit to kind of get repaired. Um, the startup world works a lot faster than that. So at any given time in your startup, you're being judged on the last six to 18 months. And so if you take this hit, you cut your revenue in half, but you get to default to live, and the result of that is you get to spend the next six to 18 months building a better product, getting closer to product market fit or getting product market fit. You're gonna be judged on just that last six to 18 months. You're not gonna be judged on when you had a horrible business that was burning more money than it was making structurally, and you're gonna have a huge advantage. And what's tricky was like this was kind

14. 26:28 – 32:22

    Twitch's pirate ship

    1. MSMichael Seibel26:28

       of our story at Justin.tv and Twitch, like almost exactly. Like-

    2. DCDalton Caldwell26:33

       Yeah, you had the choice. You looked into the precipice. You guys coulda jumped in. You coulda just let it go, like right?

    3. MSMichael Seibel26:38

       We coulda let it go. So I mean, we had raised about $7 or $8 million. We had grown to about, I don't know, let's say like 30 million monthly, um, people were watching content. We were making about $750,000 a month in revenue, but we were, we had a million dollars a month in expenses. We were burning $250,000 a month. And I swear to God, like the come to Jesus moment was with half a million bucks in the bank. And I always love this 'cause like, you know, as YC founders, we don't talk about these mistakes and wanna give you the impression that we didn't make them. Like, we made this exact-

    4. DCDalton Caldwell27:16

       [laughs]

    5. MSMichael Seibel27:16

       Like we were right there, [laughs] right? We were-

    6. DCDalton Caldwell27:19

       That's what you love about investors-

    7. MSMichael Seibel27:20

       [laughs]

    8. DCDalton Caldwell27:20

       ... is they're like, "Oh, I know everything, and they taught me this at McKinsey and Harvard Business."

    9. MSMichael Seibel27:25

       Oh, fuck no. No.

    10. DCDalton Caldwell27:26

        Like, you know, that's what's nice about being-

    11. MSMichael Seibel27:27

        [laughs]

    12. DCDalton Caldwell27:28

        ... former founders is yeah, man, we got all this shit wrong. Definitely.

    13. MSMichael Seibel27:30

        Yes.

    14. DCDalton Caldwell27:31

        Like no one knows this shit.

    15. MSMichael Seibel27:32

        Exactly. Plane right towards the mountain, like straight on. [laughs]

    16. DCDalton Caldwell27:36

        [laughs]

    17. MSMichael Seibel27:36

        Like, like deep, deep mountain, not top mountain. And we, I remember we had this meeting, um, with a lot of our employees and we were like, "Look, we got three options. We can die in two months, we can try to get to break even, um, or we can try to get this thing profitable." And I remember like I had to call this meeting, and it was one of the most embarrassing things I've ever had to do upfront, 'cause I'm just like talking about admitting defeat. I'm like, "Here's the thing. We're gonna die." [laughs]

    18. DCDalton Caldwell28:09

        "We messed up. We blew it."

    19. MSMichael Seibel28:11

        Yeah. [laughs]

    20. DCDalton Caldwell28:11

        "Hey, everybody."

    21. MSMichael Seibel28:11

        Like, yeah.

    22. DCDalton Caldwell28:12

        "I'm bad at my job."

    23. MSMichael Seibel28:14

        Exactly.

    24. DCDalton Caldwell28:14

        "Thanks for telling me about it."

    25. MSMichael Seibel28:15

        Like raising my hand.

    26. DCDalton Caldwell28:16

        [laughs]

    27. MSMichael Seibel28:16

        "I suck at this."

    28. DCDalton Caldwell28:17

        "Hey guys, I led us astray."

    29. MSMichael Seibel28:19

        Yes. [laughs] And I remember thinking, and I think this is the c- the silver lining, I remember thinking, "I have no idea whether everyone's just gonna quit or whether they're gonna rally." And everyone rallied, and it shocked me. But then like I thought about it more and I was like, what kind of person joins a fucking startup, right? It's not the kind of person who's like, "Well, I don't see any risk here." Like, "This seems like smooth sailing all the way," [laughs] right?

    30. DCDalton Caldwell28:50

        These are very, uh, mature, um, veterans.
15. 32:22 – 32:27

    Takeaways

    1. MSMichael Seibel32:22

       what's the big takeaway here? I think the takeaway here is, one, um,

16. 32:27 – 33:15

    Survive to thrive

    1. MSMichael Seibel32:27

       before you thrive, you have to survive. And sometimes you're within, you know, sometimes you're gonna hit product market fit in the first 18 months of your company. Sometimes you're not. And if you're running your company default alive, you're giving yourself enough time to figure out product market fit. And man, sometimes figuring out pro- product market fit's complicated.

    2. DCDalton Caldwell32:48

       And you're not losing sleep about the macro environment. Think about how many founders right now are sweating bullets watching the stock market and watching interest rates. And I don't blame 'em, right? Like, I'm not saying that's wrong, but the default alive founders are kinda like, "Eh." Whereas the ones who know they need to raise soon, they're s- they're wor- there's, they a- they ask a lot of questions. And I, I get where it's coming from, but they seem nervous.

    3. MSMichael Seibel33:12

       I think the second big takeaway here is that

17. 33:15 – 34:06

    To burn or not burn

    1. MSMichael Seibel33:15

       investors are not gonna twist your arm to burn. But you should also be careful to not react to the slightest suggestion that burning more might be okay. [laughs] Like, unfortunately or fortunately, you're in control here. And like, if someone whispers to you, "Oh, maybe you should f- slam that, slam that airplane into the mountain," that's not, like, that doesn't mean that you're not the pilot holding onto the stick, and you can control where the airplane's going. Like-

    2. DCDalton Caldwell33:43

       And they're gonna be fine. And you may not-

    3. MSMichael Seibel33:45

       They're gonna be fine.

    4. DCDalton Caldwell33:46

       Yeah, this is the thing.

    5. MSMichael Seibel33:47

       Yes.

    6. DCDalton Caldwell33:47

       This is what's so weird about this business, is like who has to live with the rest of their lives that that was their startup, or that they could have done something different, they weren't able to, versus the investor who's like, "Yeah, whatever. Cool." And they go, you know, they don't think about it at all ever again.

    7. MSMichael Seibel34:03

       And then maybe the last takeaway here is that if

18. 34:06 – 35:45

    10x better if operationally intensive business

    1. MSMichael Seibel34:06

       you, if you are in an operationally intensive business, you know, a la DoorDash, you better be 10x better than the people around you at knowing your numbers, at steering that plane well.

    2. DCDalton Caldwell34:20

       Yeah. The CEO, the founders have to be pushing for this. Not the board, not the VPs, not your CFO.

    3. MSMichael Seibel34:28

       Founders have to care about this. And I'd argue this is one of the dirty little secrets behind Amazon. They've always known that they were in a low margin business, and they've always run their company that way. And I'm sure they were so tempted to look at a, a Google or a Facebook and say, "Why don't we do those things?" And like, they had to be strong enough to say, "'Cause we're not in ridiculous high margin businesses like they are. [laughs] Like, we're gonna play our game." Anything I missed, Dalton? Any other final takeaways?

    4. DCDalton Caldwell34:58

       I think you got it. I mean, I think anyone who's, anyone out there who's stressed about raising the next round, this is just a helpful reminder. You should read the blog post. You do the math. But you don't have to be as stressed out. If you're default alive, it actually completely changes. It's like a weight is lifted off your shoulders. It's crazy. Because you don't-

    5. MSMichael Seibel35:18

       Yeah

    6. DCDalton Caldwell35:18

       ... you're not hoping that some stranger somewhere is gonna bail you out. It's a bad feeling. But when you're in control, you feel, you feel much better. So I would recommend it.

    7. MSMichael Seibel35:29

       Okay. All right. Great chatting, Dalton.

    8. DCDalton Caldwell35:31

       Thanks. [outro music]

Episode duration: 35:45