What is 'cargo culting' in startups, and why is it a problem?

Cargo culting is when founders focus on superficial aspects like having a great team, a cool office, or a polished product, mistaking these 'means' for the 'end' of solving customer problems. This mistake leads them to believe they deserve more funding without demonstrating real progress.

What's the alternative if a company doesn't deserve more money right now?

The most often right thing to do is to cut burn rate and try to reach break-even. This gives the company time and leverage to figure things out using its own revenue.

How did hitting break-even impact Justin.tv?

Upon hitting break-even, Michael Seibel experienced a moment of infinite clarity. He realized they could generate money from users directly, reducing reliance on investors and shifting focus from optimizing for investors to serving users.

When is the best time for a startup to raise a Series A?

A startup should aim to raise a Series A when they can show they've used early investment money sensibly to create a product people love, demonstrating sustained growth driven by revenue, not just investor capital.

What makes founders more formidable when they have traction?

When founders have a strong business with revenue and product-market fit, they become more formidable because their leverage is created. They don't need to rely on persuasion alone; their company's performance speaks for itself.

Key Moments

Why Does Your Company Deserve More Money? by Michael Seibel

Y Combinator

Science & Technology5 min read9 min video

Nov 28, 2018|33,025 views|721|11

YC Y Combinator Michael Seibel Why Does Your Company Deserve More Money Essay

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Key Moments

TL;DR

Founders spending $2M without product-market fit often falsely believe a team and office justify more funding; the alternative truth is often cutting burn to reach break-even.

Key Insights

Failing to achieve product-market fit after spending $1-2 million in angel funding means founders must justify why they deserve more money, often facing the difficult alternative of cutting burn.

Founders can 'cargo cult' by focusing on means like building a team or having a cool office, mistaking these for the end goal of success, instead of focusing on user problems and product-market fit.

Reaching break-even provides 'infinite clarity' and shifts focus from optimizing for investors to generating revenue directly from users, making the company more attractive to investors.

Justin.tv experienced its best strategy, plan, and execution when they were either running out of money or had hit break-even, leading to reduced fear and increased confidence.

Demonstrating sustained growth and a product that customers love, achieved through sensible use of early investment, is crucial for raising a Series A, not just having a good team or pitch.

A Series A program kickoff revealed that revenue numbers ($5M, $3.5M, $4M) make an idea sound significantly better than just the idea itself, highlighting the importance of demonstrated business leverage.

The harsh reality of needing more money

Michael Seibel, CEO of Y Combinator, discusses the incredibly difficult conversations he has with founders who have spent $1-2 million in angel funding but have not achieved product-market fit. The core, unforgiving question he must ask is, 'Why does your company deserve more money?' While YC companies are often made to feel special, the reality is that receiving significant funding without demonstrable success creates an expectation that the next round will automatically solve the problem. Seibel acknowledges that sometimes the next investment *could* be the one to make it work, but it's far easier to raise money if tangible progress has been made with the previous investment. He emphasizes that the primary goal is not to spend money but to achieve results.

Mistaking the means for the end

A common pitfall for founders is what Seibel terms 'cargo culting.' This means focusing on superficial indicators of success – like building a large team, having a product, or securing a cool office – and believing these achievements justify further investment. Seibel uses the analogy of an NFL coach: having a team and a stadium isn't enough if the team has zero wins. Similarly, a company needs to deliver results, not just accumulate the building blocks. The problem is that the 'means' (hiring, office space) are much easier to acquire than the 'end' (solving user problems and achieving product-market fit). Without genuine traction, these are just vanity metrics.

The power of cutting burn and reaching break-even

When a company truly doesn't deserve more money because it hasn't found product-market fit, Seibel suggests that cutting burn and striving for break-even is often the most pragmatic path forward. Achieving break-even, even if the company isn't experiencing explosive growth or significant revenue, provides critical leverage. It buys the company time to figure things out without the constant pressure of appeasing investors. This is a far more fruitful approach than repeatedly asking investors for more capital. Seibel contrasts this with the alternative: focusing solely on what investors want to hear and structuring pitches to secure funding, which can lead users to become secondary.

Personal lessons from Justin.tv

Seibel shares his own experience with Justin.tv, admitting he essentially 'fooled himself' by pitching a site where a significant portion of usage came from sharing pirated content—something easily verifiable by investors. He recounts how the moment of 'infinite clarity' for Justin.tv occurred when they reached break-even. This pivotal point shifted their focus from appeasing investors to understanding how to generate revenue directly from users. He notes that investors can be a confusing group to understand, and when faced with a choice, fighting for the user's needs is often more rewarding. Interestingly, Justin.tv's strategy, plan, and execution were never better than during the moments when they were either running out of money or operating at break-even. This period was marked by a significant reduction in fear and a boost in confidence.

The leverage created by break-even

Reaching break-even fundamentally changes a company's dynamic. It transforms the relationship with investors from one of dependency to one of choice. Suddenly, the company realizes it can generate money directly from its customers and doesn't necessarily need external investment. This realization is empowering and aligns the company's objectives with user needs. Seibel highlights that when a company *doesn't* need investment, that's precisely when investors often become interested. This shift in perceived need and demonstrated traction drastically improves a company's leverage in any future fundraising discussions.

Preparing for Series A fundraising

Seibel mentions YC's Series A program, designed to help companies 12-24 months post-YC prep for their next funding round. During the kickoff meetings for these companies, a striking difference emerges compared to initial YC meetings: founders report their revenue figures. While YC encourages innovative ideas, a Series A pitch is vastly improved by the addition of concrete revenue numbers, such as $5 million, $3.5 million, or $4 million. This underscores that while YC can help companies package and present the leverage they've created, the founders themselves must first build the core business and achieve sustainable growth.

Demonstrating traction over presentation

Ultimately, the conversation about deserving more money boils down to leverage. Founders need to show that they have used early investment capital wisely to build a product that people genuinely love and are willing to pay for. Sustained growth, evidenced by metrics and revenue, is the prerequisite for raising a Series A. Seibel contrasts this with 'snazzy pitches' or elaborate presentations that can be found on TV shows; these are often unnecessary when a company has a strong foundation. Real traction, represented by solid numbers, speaks for itself and is far more compelling to investors than mere style or a convincing narrative.

Mentioned in This Episode

●Companies

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Why Your Company Deserves More Money: A Founder's Guide

Practical takeaways from this episode

Do This

Focus on achieving product-market fit with initial funding.

Cut burn rate and work towards break-even if product-market fit is not yet achieved.

Use break-even to gain time and clarity to figure out your business.

Leverage revenue generated to give yourself time, rather than asking investors for it.

Optimize your strategy to highlight achieved traction and revenue to investors.

Present your business in a way that maximizes the leverage you've already created.

Focus on building a strong company with sustained growth before seeking Series A.

Avoid This

Don't expect more money just because you have a team, a product, or a cool office if you lack product-market fit.

Don't confuse the means (office, team) with the end goal (solving customer problems).

Don't rely solely on investor funding; aim for user-generated revenue.

Don't limp into a Series A fundraise; ensure you have sensible use of early funds and sustained growth.

Don't rely on snazzy pitches; let your company's numbers and traction speak for themselves.

Common Questions

The hardest question is 'Why does your company deserve more money?' especially if product-market fit hasn't been found with the initial 1-2 million dollars raised.