Pixar’s Golden Age, Twitter through IPO, and Building YC’s Growth Fund | Ali Rowghani | Ep. 26

[00:00] We live in a world of hedging. We live in a world of thinking with bets, backup plans, you know, contingencies, etc. And in a sense, that's very rational. OK, but what if you didn't live in that world? Like, what if you like positioned yourself against that? And what if like you tortured everything you worked on to try to be great, you know, within the context of a company? And I think that is the core of a miracle factory. All right. I'm super excited to be here with Ali Raghani. He was the CEO at Twitter in some of the most formative years. [00:30] worked directly with Steve Jobs for many years. You started and ran the YC Growth Fund. You've been an angel investor in amazing current companies like Cursor, Decagon. You've got your own fund now. You've also been an advisor to a bunch of people in our ecosystem like me over the years and so many others. And so you're just someone I've looked up to and wanted to talk to you on the show for a long time. So thank you for doing this. Oh, it's a pleasure. I'm psyched to be here. The thing I want to start with that is so interesting to me is, [00:57] the Pixar experience. And you were there for 10 years, around 2000 to 2010, give or take. And what's shocking to me, above all, is it seems like year after year after year, they just released, like, [01:11] Bangers and everyone was good in most movie studios. I feel like some of the products are good some are not but like here we had a [01:19] We had Monsters, Inc., Finding Nemo, The Incredibles, Cars, Ratatouille, Wall-E. [01:24] Toy Story. It's just up. It's just crazy. And so I guess my first question is,

[01:30] And I don't think I skipped like a bunch of misses or something. How did that happen? Like, how is the quality bar? What what went into making that happen time after time? You know, Pixar was a miracle factory. That's that's how I thought of it. You know, you start with a blank sheet of paper and then four years later you have Finding Nemo. [01:50] And then you start with another blank sheet of paper. And four years later, you have The Incredibles, Ratatouille, Up, and so on. So like the interesting question is exactly what you asked, like, how is that possible? And I think for me, I thought a lot about this question. I think for me, it kind of boils down to really three big things. One of them is we only made movies that the directors themselves felt really passionate about. [02:20] style with focus groups or whatever else. None of that. It was like, what was the story that somebody who was really talented truly wanted to tell? And then we put all of our eggs in one basket. Like there was no thinking in bets. There was no hedging. Stuff wasn't getting killed along the way. No, no. And it was once we were committed to a director and to an idea, it was like all in. And it was this focus almost like [02:44] It had to be great. The future of the studio depended on it, so it would be great. What percent of the studio would work on a given movie while it was being worked on? At the beginning, before we could have multiple films going at the same time, 100% of the studio worked on one film. So I would say for the first three movies or so, 100% of the studio worked on the film. And that started to change with Toy Story 2, which I think is kind of the seminal movie in Pixar history, because Toy Story 2, it was a new creative team, not the creative team that made the first couple of movies. New creative team

[03:14] creative team finished up on Bugs Life, which was the second movie, they turned their attention to Toy Story 2, which was supposed to come out just one year later, and they looked at it and they were like, [03:22] this isn't good enough. And so they replaced the creative team. They took over the movie nine months before it was supposed to come out. And if you know anything about animated filmmaking, nine months before the movie comes out is like not when you start over. These films take multiple years to make. And they rewrote and remade the movie from scratch. And it almost like killed the studio to do that. But Ed Catmull talks about that was the moment in Pixar history because faced with a choice of like, do we release something we're not proud of? Or do we kill [03:52] to stop everything and focus on making it great. And that established a culture, a set of norms, and this notion of we don't think in bets, we're all in, no hedging. And I think that really means something. So that's the foundation of it. And then there are two other things in terms of the process that I think are super important. One is the Pixar films were made and remade and made and remade a dozen times before the audience ever saw them. And not many people know that, but what we [04:22] do is we'd have this process called story reels, and we would expect the directors to write, essentially, a moving comic strip version of their movie and temporary version of the movie, produce that three to four times a year, and it was shown in public within the studio. And we'd get the brain trust of the studio, creative brain trust together, and they'd give a bunch of notes on this thing. So there was a rapid prototyping process, and the thing that was important was not how bad the movies are when they started, but that they were showing improvement

[04:52] was really important. So that's two. The last thing is [04:57] There was an incredible sort of like open feedback on the films, meaning like you were expected as a director to hear the feedback of other filmmakers on your movie. You had the, you know, the decisions were yours in terms of what to do. But [05:12] But you had to hear it, you know, and so we built this sort of culture of it being safe and OK to show work that wasn't finished to show imperfect work. And that just meant that the work in process work always got better as opposed to someone working for two years and finally showing you something and you saying like, OK, that's crap. You know, if it's that kind of a kind of a culture, then the feedback is shattering and it's not sought. [05:42] work when they know it's not very good, then it, I think, breeds this culture of always getting better. [05:47] That decade, like the 2000s, [05:50] I guess Apple was and is also very much like that. You go back and you think about going all in on the iPod and then the iPhone. That was also, I guess, it couldn't have been a thinking in Betts' culture there either, right? Certainly in terms of the quality bar, that everything they release to the public has to be great and that you take the time to make sure it's great. I think in that sense, probably. I don't know if Apple had, I think from just hearing from the outside, there were lots of things they were working on that they killed along the way that they just didn't think was good enough. [06:20] set and all this other stuff that you and I have heard about. So I think there probably are some similarities.

[06:26] different businesses, different process. I think I didn't fully realize this until we were chatting before, but Steve Jobs was CEO of both, right? He was running Apple through this, I guess, turnaround and getting the iPod and iPhone and everything else in those years. But he was CEO of Pixar during that same time. Yep. [06:45] And for at least some number of those years, you worked directly with him. [06:48] So I guess I don't know other people who have worked directly with Steve, so I kind of want to ask a few questions about that. What was, I guess, just to start, like, what was he like? Like, what was working with him, like, in a sort of regular cadence business? What was that like? You know, he was the most impressive, like, business coach. [07:06] creature [07:07] I've ever been around in a room and it wasn't because he was famous or it's like, oh, there's Steve or anything like that. And in the end of the day, for me, it boiled down to, [07:17] A set of basic skills that he had, you know, his ability to break down a problem in real time, his ability to communicate really clearly, his ability to inject urgency and kind of like cadence and urgency and importance to everything that we did. [07:47] help guide the discussion and help us get to the truth. And so he was so good at developing this, generating a map of the world. And even if he was wrong about certain things, you fed him new data, and he would recalculate it. And you always had the feeling being around him that, wow,

[08:06] This... [08:07] I thought this game we were playing was level 1 to 3, but then you saw somebody that was at level 20, and it was incredibly inspiring, just the way he did the basic stuff. So what are some of those basics, like communication, understanding and pulling things out of people? What specific sort of things stuck out to you there? Can you share more of those basics done really well? Because I feel like, I can't remember [08:31] where I saw this recently, but someone's talking about if you don't know what your equivalent of practicing scales is, you need to figure that out. And I feel like when you're talking about basics, that's something that doesn't get discussed enough in business. Because especially as a CEO or an executive or an investor, you kind of don't even know what your basics are a lot of times. What were those? Yeah. So, I mean, it was really some of the things I mentioned. And I think what happens with most of us, certainly with me, is you get pretty good at communicating. You get pretty good [09:01] or like trying to decipher something or developing your own mental map of the universe or a mental map of a particular problem, particular discussion. Yeah, and then you feel like you don't need to refine it more. Yeah, you don't even think about it anymore. Like you just take it for granted. Like I'm pretty good at this, you know. And it reminds me of like I was a German student. I went to Germany and for the first like six months I was there. My German was terrible and every day I would come home and I would work and work and work and work and to get my German better. And I got to a certain place where I could no longer embarrass myself. I stopped working. Yeah, you know. And

[09:31] saw. He was always like, you know, it was always, it could be better with everything. It could be better. I could communicate better. My, the email could be better. I could motivate better. I could communicate. Like he just, it just felt like he really worked at it. And, you know, I've been asked a lot over the years, what was it like to work with Steve, et cetera. And, you know, I would, I would say some version of this talk about basic skills, you know, not knowing if it really landed or people understood. And then on the 10th anniversary of his passing, I read an obituary [10:01] famous head of design, who worked probably more closely with Steve than anyone. And there was a line in that obituary that really stuck with me. It said something like, "Steve was obsessed with the nature and quality of his own thinking." [10:15] And he worked so hard at it to be able to always think with a rare elegance, vitality and discipline or something like that. And when I read that, I was like, that's what I meant. That's it. That he worked on his own thinking. So he was not just thinking about like the business, the products, his team. [10:45] that he critiqued. Do you think that was an internal process, or did he... [10:50] practice that with others somehow? Like, did he let other people in to give him feedback on his thinking? And that's how he did it? Or was he just so reflective and so focused on it? And I guess the reason I'm asking is if somebody else wanted to do that, if I wanted to try to be better at that, what's like the path to improving my own thinking? The honest answer is, I don't know. Like he may have had certainly early in his life, people who like, you know, mentored him or that

[11:20] And the nice thing in a way is like we live in a world where like a lot of our communication now is recorded. Like if you think about, you know, all the meeting recorders on Zoom and, you know, you give a talk in front of a big group or, you know, this podcast. You can go watch this. Yeah. Yeah. You can watch it. And then you can always ask yourself, like, how could I have been clearer? How could I have asked this better? How could I have been more motivating? How could I have injected more urgency into it? And the important thing is recognizing that there are 20 levels to the game. They're not just three. [11:50] 20 and then when you when you were so good at the basic stuff the stuff you use every single day to generate your mental model of reality and find the path the strategic path forward those basic skills over a career compound more than anything else because these are skills you use every single day it's funny that you say that about it being solitary one of the things that I feel sad about for myself and I think this is probably true for everybody's like I think people don't think enough like I think people don't just quietly think very often yeah and like you know any downtime we have like we're on our screen yeah and people just rarely I think [12:20] I think this is why walks are powerful, honestly. It's one of the easiest ways to just go think. Right, yeah. I mean, another thing about Steve is he thought really quickly on his feet, for sure. But whenever he had big presentations to give for Apple or whatever, he would spend two months preparing. He would go into this hermit phase, and we would rarely see him during that phase at Pixar. He would come around less, and he would just be working on this presentation. And so I think there are a bunch of lessons. By himself. Well, no, I'm sure he had a team. But it was primarily a lot of focused attention.

[12:50] on his presentation and rehearsing and rehearsing it and making it better. Look I think the lesson for all of us and especially like the lesson for like anyone trying to get something off the ground or early stage founder or whatever is like, [13:03] Just always focus on sharpening the saw. Always focus on that. Don't assume you're good enough ever. There's always better. And if you focus on the basic stuff, that really compounds. So I guess think about your own thinking. Because if you can make that better, the downstream impact of it is really profound. What did you learn that you can share about? [13:26] Ed Catmull or John Lasseter, who are the other leaders? I think Ed Catmull was the architect of the Miracle Factory, in my view. And he... [13:36] You know, like this idea that like we have to make everything great, which, by the way, like if you think about it. [13:44] Again, applying it to like, I mean, what greater aspiration would anyone trying to start anything have than to try to build a miracle factory of their own? And so, I think really for Ed, it started with having an extremely high bar for what was great. [14:00] You know, and always trying to, you know, you perform to your own expectations or you perform down to your own expectations. And like he helped, he and John both, who is the chief creative officer at Pixar, held the studio to an incredibly high bar about what was good. And they were willing to pay the costs of, you know, whatever cost was necessary to maintain that bar. I think that's the key. It's easy to say, but there's costs associated. Exactly. And they're personal and emotional, financial. There's a lot of costs associated with maintaining a high standard. That's right. So, you know, I mentioned the Toy Story 2 story.

[14:30] Ratatouille where you know the film wasn't coming together and the director of the film was replaced another director was put on the film and then the film was essentially and then they delayed the release of the film by I think six or nine months or maybe a year I don't know some period of time which in animation is a big deal and it makes the movie a lot more expensive but then Ratatouille becomes like one of these incredible you know [14:49] members of the sort of like canon of Pixar. There was this great tweet from John Collison and it ended with basically like the world's a museum of passion projects or something like that. Basically just that like every good thing you see in the world, like somebody had to sacrifice a lot to do. [15:05] produce anything at a high standard. That sticks with me. That's right. And it hurts. Yeah. Yeah. And, you know, and we live in this world where, you know, particularly investors, and look, investing isn't like Pixar, but in a lot of ways, but like, you know, we live in a world of hedging. We live in a world of thinking with bets, backup plans, you know, contingencies, et cetera. And in a sense, that's very rational. Okay. But what if you didn't live in that world? Like, what if you like positioned yourself against that? And what if like you tortured everything [15:35] the core of a miracle factory. Because what you say about like, how did they repeatably produce success with no flops? Yeah. It's because like they had that mentality, like everything had to be great. It's funny. I would say the thinking in Betts mentality is... [15:49] It's not discussed that much, but it's extremely central in tech, like to how startups think, to how investors operate, to even how people working at startups manage their careers. I think people think in bets in a real way. And you're kind of describing the extreme opposite. Yeah. And personally, I don't think startup founders should think in bets. There's an argument for investors thinking in bets. It's a different game. But startup founders thinking in bets, I don't think is the right thing.

[16:19] extreme conviction in and you'll sort of die trying to make this thing work because it's so hard. And if you're not committed, pot committed, then it's just that much harder. Okay. I want to move over to... [16:30] Twitter, now X. You were COO there from 2010 to 2014. And obviously, those were crazy years. I guess on some level, it seems like for the company, all the years are crazy years, but there was a lot going on then. Can you just... [16:44] Tell me about what was happening at a leadership, founder level. What were the big chess pieces moving around at that time? So when I joined Twitter, we had less than 100 employees. We had no revenue. We didn't have a business model. We weren't sure we were going to make money with ads or some other charge memberships. There were all sorts of things. The site was going down all the time? The site was going down all the time. The fail well. Yeah, there was a logo for those who don't remember. [17:07] the company built its own logo for the site crashing and site going down, which was the fail wheel. It was kind of a bit of a laughing stock company. It clearly touched a certain cultural zeitgeist. It had about 15 million users. We just ran Twitter.com. We didn't have any mobile apps. We didn't have any mobile engineers at the company. And about eight months or so after I joined, there'd been a lot of founder turmoil between Jack and Ev. And Ev was the CEO when I joined, and he was out. [17:32] And Biz kind of walked out with him. And so we were sort of founder-less about eight months into the tenure. And it was both a sort of like hyper-scaling challenge because the opportunity was so large and effectively a turnaround because all the leadership was pushed out. There were a lot of wrong people in various positions. It's a very interesting case study because it seems like it had…

[17:53] unstoppable product market fit and then was just not run well. [17:56] That's largely right. It's better than the inverse, I guess. Yes. Yes. Yeah. Yeah. Sometimes part of market fit is so powerful that it allows you to make a lot of mistakes at the top. Reddit had this for a long time. Yep. [18:06] Yeah, that's right. Yeah. And so, yeah, so I joined it when it was in that state. I left about four or five years later and we'd gone from no revenue to $2 billion in revenue. We'd gone from 15 million users, 300 million users. We'd gone from just one office in San Francisco to 23 offices in 14 countries. And when I look back, I think there are a couple of things we did great and a couple of things I did. [18:24] wish I could have it over again. I think the two things that we did great, one is I think we got monetization right. And the core of it was, I think we figured out before any social platform that if you can make the ad unit and the content unit the same, in our case, tweets, then you have the ability to make ads feel more like content and you can judge them based on relevance and you give advertisers the ability to participate in a conversation. And my favorite example of this, [18:54] the lights went out of the Super Bowl, Oreo, which was Oreo cookies, which was an advertiser on Twitter, right at that time when the lights are out, it sends out this tweet, promoted tweet that talks about dunk after dark. That's good. So dunk your Oreo cookie and milk is dark or whatever. And it got a lot of attention, a lot of buzz. And it was just clever. It was content. Or was it an ad? I don't know. It made people laugh, right? So I think we got that notion of the ad unit and the content unit being the same, right?

[19:24] was it was graceful as the platform shifted from desktop to mobile. Facebook at the time, you may remember, kind of stumbled because its ad units were built for the desktop, which is the majority of the users. That's how they interface with Facebook until that changed. And so they kind of had to figure out what their ad units would look like in a mobile world. I think Twitter kind of nailed that. The second thing is we scaled the company globally really fast and generally pretty well. And as a result, there was a big global audience, and we built a global business quickly. [19:54] Those were the things I think got right. I think the things that I regret or big learnings for me were, [20:00] Probably the biggest one is the company never showed enough curiosity about its own users. And we had a mental model of who a Twitter user was that way lagged the reality of what Twitter users were across all these countries, across all these devices, using it in a merrily of ways. I can imagine that the early adopters in the middle of the pack of the curve are completely different. [20:30] of your customer naturally lags. There's inertia in how that model moves relative to reality. And you have to, if you're going to keep up with who your users actually are and what their needs are, you have to actually develop a ton of discipline and a ton of rituals and processes to keep up. I remember Patrick Cawson asked me years ago to attend one of their all hands, and this is all I talked about. All I talked about was like, hey, your platform is starting

[21:00] ways in which your views of your users are maybe outdated to who your users actually are today and what they're doing. So that was a huge thing at Twitter. And unfortunately, there were big product launches that we had. One of them was the conversations feature. You remember the blue line? I do remember that. It was so hard to use. Yeah. Well, what happened was probably our most engaged users of Twitter were people who were using the platform to subtweet their friends, often with false identities, kids usually. And [21:30] users in the United States, we launched a feature that broke [21:33] Twitter for them. And that was simply because we didn't really understand who they were. We were building for ourselves. That seemed nifty. And so that's a really dangerous thing to do. The other thing, the other learning for me was we were too precious. I mean, we were too precious about 140 characters. We were too precious about the reverse chronological timeline. And I think one of the things I give Elon credit for is he sacrificed all the sacred cows. He basically trusted that the network was strong enough that he was free to experiment. [22:02] Whereas I guess old Twitter was afraid of breaking the golden goose. Yeah. Or they had this, there was definitely part fear, but part, I think there was a belief that our differentiation was in making the product exceedingly real time and shorter tweets that are reverse chronological make it more like the pulse of the planet, more real time. But I think the mistake was that actually wasn't what the majority of humans wanted. It was just what a subset of humans wanted.

[22:32] important stuff is happening, it comes to the top, which is how I think it basically seems to work now. Yeah, that's right. It must be interesting for you to watch [22:38] Elon do what he's been doing with it, which is so different from what you were doing. And I'm sure there must be a lot of things that he's doing that you... [22:45] think are really good. I'm sure there's some things where you're just like, what are we doing? I'm curious to hear your observations. I think he made a bunch of unforced errors. I think the check marks thing, I think, was really poorly handled. Letting people buy the check marks. Shouldn't have done that. It shouldn't have been handled the way it was handled, where the thing that verified your identity was suddenly for sale. And of course, somebody bought the drug maker's handle, the check mark, and they tweeted. It did feel like the blue checks thing was driving a lot of people. It made this multi-class system and a thing that I think didn't feel good. [23:15] I think what you're saying is like it wasn't necessarily a bad idea. It's just the way that it went down the rollout was bad. Yeah, it wasn't as thoughtful, you know But look I never expected him to change the name, you know, that was that was surprising. Yeah, yeah I mean, I think it's in a sense it indicates that he has something bigger in mind and maybe that's cool You know, he took a lot of costs out of the business. I also wonder if it was just like a sign to say like nothing sacred Like even without a big plan just big I'll change the name. Yeah, like says something. Oh, yeah, for sure

[23:45] You're right. I think the powerful thing is the network is so durable. And we can debate whether we like Twitter more now or before or whatever, whatever, whatever. But I think it's – I mean, one of the things I'm proud of is I got to work on something that I think is going to be around when my kids grow up probably. It doesn't seem like it's going to have a chance to go away, which I'm happy about. I think it's really good. Yeah, me too. [24:03] Okay, so... [24:04] you had those experiences and then you went into venture. So talk about that. Well, I joined YC. You joined YC. Yeah. Is that venture? Is that now venture? But yes. You had a large venture fund at YC, but really you were at YC. So that was like the beginning of the growth fund, right? That was right at the beginning of it. And obviously you invested in a ton of great companies and you learned a lot from it. So I guess, can you share maybe like, I want to spend more time talking [24:35] So, you know, I feel like everything kind of happens serendipitously. Like, you know, I joined Pixar because I was like in awe of how could anyone make Toy Story 2. Yeah. And they were a public company at the time. And it was kind of like this, like... [24:48] as we said, Miracle Factory that attracted me, and I was there for a decade. And then I went and joined Twitter, and what I learned there was like an experience. There was this hyperscaling thing and taking something from zero revenue through IPO. And YC, which is another serendipitous thing, and I was approached by Sam, and he said, hey, would you join YC initially just as a visiting partner and hang out with some of the growing companies at YC? And how can I turn that down? It sounded like a blast. And then a few months later, he said, hey, we're going to raise a fund. Would you lead it for us? And so I was like, wow, start a fund from scratch, and I've never been an

[25:18] in the world's great universities. It's also one of the only strong network effects, which you have obviously learned from Twitter, is extremely durable. Exactly. Yeah, exactly. So, you know, how could I say no to that? And so it's a bunch of serendipity, but the thing that, like, I really... [25:30] What YC really taught or showed me was it exposed me to early stage startups at massive scale. I mean, I was at YC almost 10 years, and I think close to 4,000 companies went through the batch program during those 10 years. And there were probably 200 to 300 Series A rounds every year. There were more than 100 Series B rounds every year. And my team wasn't involved in admissions to the batch or really the batch program, which is YC's bread and butter and what they're best at in the world. [26:00] But what we did is we helped founders after Demo Day with a whole series of stuff like their Series A's and helping with their decks and feedback. And we ran all these programs and so on and so forth. But the thing that I take away from it now a few years later is like, wow, I got to see a lot of stuff at the very beginning. And it influenced both what I do now but also the way I just think about the stages of life. [26:30] is like they plant seeds. I mean, Justin Kahn used to work at YC said, we're not hunters like VCs, we're farmers. And they plant seeds and try to get everyone from seed to sapling. So hopefully work on the right idea, hopefully launch a product, have a successful demo day, raise money and get a few customers. And that gets you to the sapling phase. And then at the sapling phase, that's actually interesting.

[27:00] We talk about zero to one, maybe that's zero to 0.2 or zero to 0.4 or something. And then there's a phase in the sapling phase before the tree phase. And the tree phase for me is like when you scale a company. In the sapling phase, which is actually where all the death lurks, that's where startups die. I did a program with you in 2019, I think it was, with the growth program. And then I did YC in 2016, but we didn't have product market fit when we left YC. We were a 0.2 sapling still. So it was very much about getting the DNA and the mindset right and learning stuff. [27:30] So I'm fascinated by this sapling phase of what actually happens here, because it's actually hard to support founders here. Because the great thing about the seed stage, and I think in many ways the scale stage, seeds and trees, is that they're a set of common things that if you really do well for founders as a support to founders, it helps all of them, or almost all of them. Some of the basic lessons of YC, some of the basic writings of PG, etc., they're gold. [28:00] And at the scaling of building a company phase, same thing. There are a set of things about how to hire executives, what is the job of the CEO, how to manage, how to develop strategy, communicate more broadly, figure out HR, all that stuff. There are a lot of commonalities across companies. But at this sapling stage, [28:16] everything is much more bespoke. It's not really about hiring. It's really about trying to find the right customer, find the right problem, solve it really well, and then figure out a way to do it again and again and again, repeatability at that phase. And I think to help founders at this phase,

[28:35] The whole industry, as you and I have talked about, has gone to much more scale. YC is a lot bigger than it used to be. All of the venture funds are way, way bigger than they used to be in terms of capital and investments made and so on. I think there are aspects of this industry that scale works really well for, and there are aspects of this industry or the journey of a startup where I don't think… It's the ends where it works. YC, I think, can actually scale more if they wanted to, where you can plan as many of these seeds. [29:05] conditions for somebody to start a company that wouldn't have otherwise. So you could have as many of those as you wanted. And then at the far other end of the bell curve, where you can just put tons of money into these companies, billions of dollars in the companies that are scaling, that obviously goes. But even at the phase where like, okay, we're now starting to hire a bunch of executives and we need intros to Fortune 500 companies. It's not just like very, very late stage capital. You're talking like series B and C type of stage? Is that what you're feeling? [29:35] like where's the line, right? And to me, it's like, [29:38] five or $10 million of revenue is the line. It's not a million. It's definitely a 500K. Why do you say it's not a million? Because a lot of times people are like, "Oh, it's a million dollars. That's product market fit. That's the A." There's no repeatability at a million dollars. You haven't proven repeatability, and you've just proven that you can get someone to pay you, or get five people to pay you, or seven people, or whatever it is. To get to one, you have to prove repeatability, in my mind, which means that you've found a problem that enough people have, and you've found a way to be

[30:08] buy it. And the other thing, obviously, you have to prove in that phase is not only do you convince them to buy it, but they use it. They like it and they want to buy it again. Or renew or buy more. Or if you're in a consumer business, the cohorts stick. And similarly, in a B2B business, the renewals and expansion are happening. And renewals and expansion are probably the best metric for product market fit. It's a lagging metric. And you don't know right away. Yeah, you don't know. You got to get good at figuring out the leading indicators of it, but you don't know. So, yeah, [30:38] at the two ends, and I don't think scale works at the sapling phase. [30:42] What I'm trying to do now is I saw a bunch of patterns of where things went wrong at this phase for companies and how certain founders like find their way through the maze and swim through. And I think the most the hardest one, it's a simple, slippery problem that I saw people encounter over and over again, which was like, who should my initial customer be? [31:12] And so, you know, founders would let customers choose them instead of being extremely selective and choosing customers. And that requires some degree of... [31:21] courage to like, [31:23] turn down some growth. Because you're looking for someone that you can deeply satisfy. And the broader and more diverse your customer set is with a small team and an immature product, the harder it is to keep them all happy. I think that this exact phase, I think, is one of the most psychologically demanding for founders.

[31:40] you so badly want things to be just moving, and you want to just grow. You want to tell people you're growing. You want to take customers. You don't want to think that you need to pivot or adjust your product because then you have to feel like you're admitting defeat somehow. I think this phase is so mentally difficult. Yeah, yeah. So for me, it's the funnest time in a startup, and I think it's where all the death lurks, where the death zone is. Whether someone raises an A or not, that's kind of irrelevant. This is like the pre-series A. [32:10] But I think a lot of times it's post-Series A too. I mean, who raises the Series A at $10 million? I'm saying it's through at least five, until you've proven this. So you're talking – what's interesting to me is I think [32:22] different than in a lot of conversations where people would say three to five million, you're on your way. And you're talking about, no, that's still fragile. It's still a little fire that needs to be like, tended to. Yeah. Like, I think that until you've proven like retention and expansion, and until you've proven repeatability, which I think happens somewhere around five, and maybe as far as 10, depending on the business and stuff like that, a certain amount of time has to elapse. [32:46] you know, to be able to really judge it. And so, I mean, I think there's a pre-traction phase and a post-traction phase. And I think there's a, there's an inception stage, which is like where YC lives and they do the best job in the world. And as you say, you know, they both cause there to be more startups and cause promising and help promising founders work on better ideas. Like we all owe them a big debt of gratitude for that. And then there's a sapling phase where I think all the death lurks, whether it's pre or post day. And then there's this tree phase where like, Hey,

[33:16] Yeah. Like a rain is not going to wash you away. You've got roots. Yeah. And now it's about company building. And I think VCs are great at that. Actually, can you talk about for a second, I have shared your blog post a ton of times about the second stage of, second phase of the year? Second job of the year. I'll link it because I think it's an extremely good post. But like, can you talk about that? [33:34] transition for the CEO and what that post was about? Yeah. So the interesting thing is, I think that if you like this analogy of the three phases, seed and sapling and tree, the CEO, founder CEO's job changes a lot between sapling and tree. And because the job becomes, at the beginning of the job is just about build a great product and find customers and keep those customers happy and get them to renew, et cetera. So it's about product and customer, product and customer, right? Once you get to this place where like, oh, I'm now a tree, it's taken root, I have a business, [34:04] I know like, you know, I have some foundation at that point. Then the job of the CEO changes they tend from building the product and selling the product to [34:14] building the company. You need to build a machine that builds the machine. You become the PM of the company, not so much the PM of the product. And so that means you got to find people to do all that. You got to get yourself out of these vital things you were doing before. And that's super hard. And so that you can focus on the second job, which is company building. Yeah. That's the basic point of the book was. So when you thought about putting your firm together, you also were doing a program. How did you decide what structure a firm and a [34:44] you wanted to do. So what I'm interested in doing is I'm interested in working very intensely with a very small group of these sapling kinds of companies. And really on either side of a series A, I'm a little bit indifferent about that. But people who have launched their product, they've got some traction, they're committed to what they're doing, there's some beginnings of something. Like, I don't think I'm very good at the seed stage. I did a lot of the growth stage, and I know that pretty well. But this sapling stage is, I think, where founders need the most help. And in order to help

[35:14] them, you have to do it almost subscale. You have to do it really, really intimately and closely. And so I want to work with a very small group of folks and try to make a contribution there. And so, yeah, so that's basically my hope. That's great. One of the things that you've talked to me about before is that you think... [35:35] I don't want to put words in your mouth, but I think you said the Series A is often a bit of a ripoff, and that people take way more dilution than they need, that it's like the rounds are bigger than they have to be. Yeah. Is that still something that you feel, or is that an accurate thing that you at least felt at one time? Do you feel that way now? Well, I think that what's happening, and I expect it to continue, is that the traditional ownership that a traditional Series A investor would get in the Series A has degraded and will continue to degrade. Yeah, because it used to be like 25%. Even more. 30%. Yeah, but yes. Yeah. [36:05] And that's just driven by the supply and demand of capital and the like, you know, like very sort of burgeoning nature of the seed ecosystem. And I think that I also think you have a dynamic where. [36:15] There's not just the availability of capital or the prices are low, but it's like the venture firms are winning and they're pushing. [36:22] the founder take more money than the founder even thinks they need. And they're like, okay, but I want to work with whoever. Yeah, that's right. Yeah. So I think that the nature of the Series A is changing, and I think largely to the benefit of founders. But the other thing that's kind of fascinating that's happened, I think, over the last five, seven years especially, is more capital is flooded into the system. You know, deals are getting done in a blink of an eye. And founders don't fundraise anymore. They just get preempted, the good ones, or the promising ones. And their plan is to do it.

[36:52] at this time and they have a couple of conversations and they let the round happen before it's going to happen. Yeah, sometimes the founders encourage or… They make themselves available to get preempted. Yeah, but sometimes it comes out of the blue. I mean, you see that too. So in this world of super rapid fundraising, where founders aren't generally fundraising, they're just getting preempted, I think that obviously there's a lot of convenience there for a good founder. But on the other hand, I think what happens… I don't think I've seen a single fundraise in the last five or seven years. Tell me if you disagree. [37:22] where... [37:23] there was actually any urgency to fundraise at that time. You know, this preemption mentality, the founders aren't driving the timeline. No, and they're actually like, "When should I raise so that I don't need the money?" I mean, people plan to raise, which again, they should, it makes things easier. As I'm thinking out loud, I do actually think, so I think you're right that a lot of the strong companies go for the preemption. [37:43] There actually might be on the far other side of the very, very outlier companies, they actually do run a process because they're so confident that it's going to work that they basically are like, we're going to get a true market price here. [37:54] I think it definitely happens. Or they get preempted and they use that to trigger something. But again, over three days. Which I think is in some cases a shame. If you're going to spot pick a board member in three days, I don't know if that's all. As long as you've got enough trust in your cap table to know what you're getting, it's good. But I don't know. I think sometimes it's worth a little more time to get to know people.

[38:24] already a tree and it's now primarily about terms and maybe who you want or prestige of a particular name or ability of a certain investor to open some doors or whatever, I think [38:35] You're also usually dealing with very known quantities at that point. Yeah. And for companies that are trees and have been around five years, you've had a chance to hobnob with investors over that long period of time. It's only for companies that are one or two or three years old and haven't just met someone, or someone heard about something and they swooped in and now you're in a conversation for the first time with some famous investor. I think those are the ones where maybe slowing down is beneficial. [39:05] pays to slow down enough to be able to [39:08] I don't know, ideally simulate what it would be like to work with someone and then make your decision. And just know that you actually control the timeline and don't necessarily cede that to an investor. Investors, I think, are extremely good at hijacking the timeline of a fundraise because they practice it so much. And sometimes that's fine. I'm not saying in all cases, like, hey, raise money, it's easy, it's there, et cetera. You love the investor, you know the investor. But I don't think in all cases it makes sense to do that. Are there any other structure of the way you're doing things aside? [39:38] beliefs you're sort of operating against right now that are sort of driving the way that you work? Well, I just, you know, it's funny, and this may be a wrong strategy. You know, it's certainly contrarian, but like, I don't really... [39:50] I want to try to get to know the founders and businesses that I invest in deeply. And in some cases, that's related to working with me on something, or in some cases, relationships I've had before or whatever else. But as I said, more capital is meant that deals happen in two days. And it's become kind of like this first-person shooter video game. And I don't want to play that game. I also guess the nature of the way you're doing this is with your program where you're trying to help before you have any equity in people, which is, I guess, on some level fundamentally unscalable.

[40:20] Because you can only help so many people where you're not in business with them at a time. But the advantage of that is this. Yes, that's right. And look, something I learned at YC. YC was obviously an insider on all the companies within YC, but our growth fund wasn't. And we helped tons and tons of founders that we never invested in. I mean, it was good for YC to do that, of course. But that mentality of, hey, the more help you provide, it finds its way back to you. Just like karmic thought. And just my own personal belief. [40:50] I'm wired, I just think like, hey, you help people without [40:54] you know, expectation of return and it pays it back in one way or another. It's something I believe and just how I want to work, you know, so we'll see how it goes. All right. Well, Ali, this was awesome. Thank you so much for making the time. I really enjoyed it. It was a pleasure, Jack. Thanks for having me.