10 Insights from "Lessons Learned from 1,000+ YC Startups with Dalton Caldwell"

I recently listened to Lenny's podcast, where he spoke to Dalton Caldwell, Managing Director at Y Combinator, and discovered a few interesting insights. Here are 10 of them:

#1 Airbnb

To succeed in a startup keep going, try new things and believe in your idea.

Airbnb faced multiple challenges and setbacks before achieving success, including the possibility of shutting down several times prior to entering Y Combinator. The founders of Airbnb, Brian Chesky, Joe Gebbia and Nathan Blecharczyk, persisted with their startup despite facing personal and professional difficulties, believing in their idea.

What makes this quite interesting is that Airbnb could have just given up and moved on. I often wonder how many startups give up just before getting their first customer. But what if it’s the right call, as continuing to work on the product might be a waste of time if it doesn’t address the market's needs. But as we learn from Dalton later, it might be a good time to pivot.

They [Airbnb] probably should have shut down three or four times before they got into YC. It objectively wasn't working. They were basically ruining their lives, they were disappointing their parents, everything was wrong and it was a purely irrational act for the founders of Airbnb to keep working on their goofy startup.

They tried all sorts of stuff including cereal and conventions. They had a bunch of zany ideas on growth and they didn't run out of them. And so I think when there's still gas in the tank on an idea that might be a reason to stay the course. And when literally the founder is like, "Yeah, I don't know, I guess maybe we should pay influencers or something." When that's the kind of ideas they're coming up with, that might be a better sign to pivot.

#2 How to Pivot

A successful pivot often leverages existing expertise and builds on prior knowledge. You don't necessarily need to have that experience to pivot before starting the company; it could come from trying to build the company.

Successful pivots often build on prior knowledge and experience. The founders of Retool had experience with similar internal tools when building Cashew, a Venmo competitor. When Cashew failed, their familiarity with analytics and strong opinions on the topic due to their prior experience sparked another idea that eventually became Retool. You don't need to necessarily have that experience before you start the company; it could come from trying to build the company.

Usually, a successful pivot gets warmer instead of colder from what you're an expert at and somehow builds on what you learned on the prior idea.

In the case of Retool, it was the same thing. They had built similar internal tools both at their internships as well as for Cashew. They had all these dashboards they built to operate their Venmo competitor. And so they knew a lot about what to build in the case of postprod, pivoting and through idea, they knew a lot about analytics and had strong opinions about it. And so it was much closer than what the original idea is.

A good pivot is like going home. It's warmer, it's closer to something that you.

#3 How to find ideas for your startup

Start by looking at companies that are publicly traded and/or owned by private equity, which are large and also disliked by their customers. Try to intentionally find a big market within these incumbents where the software is notably lacking. Basically, find a large incumbent with a very low NPS and try to disrupt them.

#4 The concept of tarpit ideas

Tarpit ideas are those that receive a lot of positive feedback and seem like great startup concepts e.g., coordinating social gatherings or improving music discovery, but often lead to challenges. Unlike obviously bad startup ideas, tarpit ideas get initial validation and support. Despite initial excitement, users often fail to engage with tarpit ideas consistently, leading to their eventual downfall.

Here at Backpocket we explored a couple of those tarpit ideas as one of the features of the product but dismissed them…for now. We might still experiment with these ideas as the core product is the social payment menthod so going up the customer journey makes sense.

The weird aspect of what we call a tarpit idea is an idea that a lot of people come up with and then it seems like an unsolved problem and you get lots of positive feedback for. And you have a really good set of arguments that it's a really good startup idea.

And that's different than a bad startup idea. A bad startup idea is, I don't know, something that is obviously bad or something where you just can't get any positive feedback on.

But some of the most common tarpit would be something like building an app to coordinate with your friends to decide where to go out at night or where to meet up with people, which is really, it's coming from a good place. It's a good idea. If you ask your friends, "Hey, would you like an app for us to coordinate to hang out more so we can be friends?" They're like, "Yeah, I would love that." You'll get all this positive feedback from the world.

People have been starting that startup since the '90s and so you can validate it. Part of being a true tarpit is that you can get good initial validation.

And I worked on tarpit ideas myself as a founder, which is a music discovery. This is something I did in my first startup. Music startups are hard and trying to be like, "Oh, we're going to fix music discovery." This was classic things where you can get lots of positive feedback and even get users to work on those things, but there are aspects of it that make it a very hard idea.

So anyway, that's a tarpit, is just something that's super appealing and a lot of people do it. And then you can get validation and that's why is a tarpit, is it draws you in and you get stuck because it seems like it's a good idea and you get all this positive feedback.

#5 Is Market Size important for a startup?

In early-stage startups, market size matters less, and some highly successful startups initially had small Total Addressable Markets. While market size becomes more critical eventually, especially at later stages of investment, it's not a primary concern for early-stage startups since many startups pivot anyway.

I think it really depends on what stage you're investing at and it's absolutely critical the later stage you get. If you're going to invest in a very high valuation, it is really important. The earlier you go, the less it matters. And some of the most phenomenally good startups, if you were really pedantic about it, the TAM would be tiny. The TAM of Uber would be nothing, right? The TAM of Airbnb would've been nothing.

TI funded Razorpay, which is I think the largest payment processor in India, and the TAM of that was tiny because no one was using credit cards in 2015 in India. So you had to believe that the size of the credit card industry in India would 100X. Well, guess what happened? So I'm not saying that having a large market someday doesn't matter, of course it does eventually. But trying to be super pedantic about market size when it's a pre-seed company or someone applying to YC, it's just not something I'd put a lot of thought.

#6 Delegation

Founders should avoid over-delegating and stay deeply involved in product development and talking to customers. First-time founders could face major challengess due to over-delegation.

It’s important it is to not overdelegate and for the founders to stay close to things, as well as watch out for the trap of hiring super senior people with fancy resumes, really early in a startup.

This is definitely one of those very basic things that we find ourselves repeating a lot where they're like, "Yeah, yeah, I get it. Don't overdelegate. We get it, Dalton." And then two years later they're like, "Wow, we overdelegated. We need to go clean that up." So that is probably the best product advice. And the folks that are really great at product, the founders that are always deeply in the weeds on product and still care a lot and are still talking to customers, no matter how late stage it gets.

And then they hire them and then you wake up one day and you're like, "Oh wow, everything went wrong." It's not really anyone's fault, it's just that you took your eye off the ball and this is what happens to first-time founders a lot.

#7 Prioritisation

Prioritise customer satisfaction and product development above all else. Spending excessive time networking with investors may not be the best use of time. Obsess over product improvement and customer needs, as your intuition will guide you towards the right priorities.

I think if you just care a lot about your customers and you care a lot about the product, your instincts are pretty good on what to spend time on. And so for example, spending tons and tons of time hanging out with investors and networking, it's probably the thing that I would be cutting.

It's what we talked about earlier. If you really love what you're doing, no one needs to tell you how to reprioritize your time. Your intuition will be correct on what you should be spending all your time on, which is being obsessed with product.

#8 Talking to customers

Talk to customers face-to-face, not just online, to really get what they want. Lots of folks shy away from in-person chats, but it's important to push past that. Look at the founders of big startups like Airbnb—they felt awkward at first but stuck with it. Spend a good chunk of your time meeting and talking with customers in person. Buying ads to test your idea isn't the same as talking to customers and hearing what they think.

And you can't just hide behind your keyboard and call that talking to customers. I think a lot of folks, the inclinations are to build a landing page and buy some Instagram ads and try to get people to sign up for something. And again, maybe that's something, but I think a lot of the reason people do that is they're just shy and they don't want to put themselves out there because it's a little awkward to go talk to people.

And you have to set yourself up to go out in the physical world, get people to meet with you, get them to take you seriously, show them a product you're building. You just got to start doing it until it doesn't feel bad anymore. Think about how stupid the Airbnb founders must have felt. They were like, "Hey, you should rent out your house and I'm going to come and sleep in your house, and here's an airbag.” The whole thing is a little awkward, right?

So you got power through the awkwardness of talking to people, and once you start doing it's actually fun. And so once you get used to overcoming this awkwardness, I think people do much better at talking to customers.

I think it's look at your calendar and there should be 20 or 30% of your time that the calendar says something like customer meeting, customer call, meeting with who, meeting with this person. And when the calendar is not that or it's all... Again, what you're actually doing is just buying ads to try to validate your idea, I don't think that's talking to customers. I think that's something else.

#9 Hacking LinkedIn

Zip, a B2B startup (not Australian Zip), reached out to potential users directly on LinkedIn and got them involved. They asked how users were using procurement products, and this got them early beta testers. Zip contacted hundreds of people, showing that persistence and numbers matter. This tactic worked well for gathering feedback and making connections with potential users.

On Zip, I actually have a lot of their story in one of my series on how to build a B2B startup. And what they did actually, as you know, is they just called, DMed people on LinkedIn and ask them for advice on, "Hey, we're trying to understand how you enjoy your current procurement products." And then they ended up being early beta testers. And I think they did hundreds of these. It was a numbers game. They were just grinding at this. And so yeah, that was very good.

#10 Sales

Lots of founders are scared of sales and think they have to spend a lot on coaching to get better. But a cheap and easy fix is to read popular sales books like "Getting to Yes." These books give good tips and methods, covering most of what's needed to be great at sales. Instead of paying for pricey coaching, founders can learn a lot on their own by reading books that are easy to find.

I think a lot of founders are afraid of doing sales and they don't know how to do sales, and they think they need these really experienced sales coaches and they need all this training, and I'll be like, "Well, go on to Amazon and find the most popular sales books like Getting to Yes that everyone reads, and just read those and that'll get you 80% of the way there."

They want to hire someone for millions of dollars to give them sales coaching. I'm like, "Well, have you read these really basic sales books?" And they're like, "No." And so I think that's a low cost way to go on Amazon, Getting to Yes and a few other of the top sellers, I forget the names, and just read those, and that is your crash course on how to be great at sales.

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