Jessica Livingston at Startup School 2012

Context and Statistics

• Jessica Livingston, Y Combinator co-founder, notes the organization has funded 467 startups over seven years.
• Y Combinator's early model involved teams moving to Cambridge, MA, in 2005 to receive $12,000 per team.
• Livingston identifies "determination" as the primary defense against startup failure, defined as the combination of resilience (avoiding backward push) and drive (moving forward).

The Rejection Monster

• Most successful startups, including Airbnb and Y Combinator itself, faced significant initial skepticism from investors, family, and the public.
• Airbnb Case Study:
  • The 2007 concept of renting "air beds" at IDSA conferences received no external validation compared to traditional employment.
  • Founders Maxed out credit cards, ate leftover cereal, and were rejected by most investors at YC.
  • They pivoted based on user feedback, set specific goals, and implemented rigorous measurement, eventually growing into a global success.
• Pebble Case Study:
  • Founder Eric Mijakovsky faced rejection from over 30 investors who refused to fund hardware companies due to capital intensity.
  • He pivoted to Kickstarter with a $100,000 goal.
  • Pebble raised $10.2 million in 30 days, becoming the largest Kickstarter campaign at the time.

The Drive Monster: Improvisation and Execution

• Startups face unique, often unresolvable problems that require improvisation rather than following a playbook.
• Rajat Suri (E-Lacarte):
  • The MIT founder took a job as a waiter to learn restaurant dynamics before building a tablet ordering system.
• Stripe (Collison Brothers):
  • To overcome bias against their youth, founders initiated business discussions via phone calls before meeting in person, establishing credibility prior to face-to-face interactions.
• Lockatron (Later Switcher):
  • Faced a $20,000 shortfall to fulfill an order for 40 commercial locks; founders sourced broken locks for $10 from scrapyards, repaired them, and delivered the order.
  • When Kickstarter rejected their hardware campaign due to a policy change, they built their own crowdfunding platform in less than a week.
  • Their self-hosted campaign raised nearly $2 million.
• Justin.TV (Live Video):
  • During a critical system outage, a founder sent a pizza delivery person to an off-grid address to convey the message "the site is down" to the on-call engineer, Kyle.
  • The system was restored in under one hour.

Co-founder Disputes

• Founder breakups are a primary cause of startup failure, often crushing productivity and morale.
• Livingston warns against pairing with individuals solely based on availability rather than deep knowledge of their character, competence, and work ethic.
• Red flags include concerns over a co-founder's trustworthiness or diligence; these issues should be addressed immediately rather than ignored.

The Investor Monster

• Investors exhibit herd mentality, creating a catch-22 where startups struggle to attract funding without prior traction or investor endorsements.
• Fundraising is described as a slow, demoralizing grind that can halt company progress if not managed efficiently.
• Strategic Advice: Founders must create competitive situations to secure funding; delays by investors are often cost-free for them but fatal for the startup.
• Case Study: A YC-connected startup secured a term sheet from a prestigious VC, prompting a long-time contact VC to panic and offer an immediate investment with a blank valuation.
• Risk Warning: Verbal "yes" agreements are not binding; deals are only complete when money is in the bank, and investors have previously withdrawn after signing.

Distractions and Corporate Development

• Y Combinator advises founders to focus exclusively on writing code, talking to users, and exercising.
• Corporat Dev (Corp Dev) Trap:
  • Meetings with large corporations seeking "work together" are often "HR Acquisitions" (hiring disguised as partnership).
  • These interactions are uniquely demoralizing and can deflate founder ambition, leading them to sell the company prematurely for a nominal sum.

Making Something People Want

• The inability to identify and build a product users want is the leading cause of failure.
• Pivot Necessity: Success often requires multiple iterations of the core idea.
  • Airbnb: Evolved from renting air beds for conferences to renting rooms with hosts, then to entire home rentals.
  • Order Ahead: The founder attempted five previous ideas before launching the successful takeout app.
• Dropbox Case Study: Success required executing "one thousand and one details" in a crowded market, where the advantage came from superior execution rather than a unique concept.

The Roller Coaster of Outcomes

• Startups experience extreme volatility without the stability of larger organizations.
• Extreme Negative Example:
  • A Houston-based team (not YC-funded) moved to Silicon Valley and signed deal documents after receiving a term sheet from a top VC.
  • The VC exercised "buyer's remorse" and breached the deal just days before funds were scheduled to wire, causing the team to lay off all staff.
• Extreme Positive Example:
  • Codecademy launched three days before YC Demo Day after failing with previous ideas.
  • The team gained over 200,000 users in three days, presenting as a massive success to investors on stage.
• Livingston advises founders to avoid immobilization during downturns and complacency during upturns, noting that extreme states rarely last.

Public Scrutiny

• Founders face a "huge audience" of trolls and reporters who may make outrageous claims.
• Developing a "thick skin" is necessary to withstand public perception shifts during the startup journey.