And so if you charge a similar amount as a startup, and it sort of resembles the way the other vendors charge, the customer will be like, oh, that makes sense.
Versus when you're a founder and you try to price it in a totally weird way.
It'd be like if you were a hotel and you're like, oh, you pay with seashells.
You know, like, we don't take money here.
This is Dalton plus Michael.
Today we're going to talk about how do startups get big deals?
Six figure deals, seven figure deals, eight figure deals.
How do they get big deals?
And the kind of subtitle here is, are you selling tools or are you selling outcomes?
I think a very common first office hour topic for companies that get accepted into YCE is some version of them saying, Dalton,
It's like, they haven't even Googled it, right?
This is just like a, and I think the context is that most people understand self-service because they signed up.
Like who hasn't signed up for GitHub or signed up for Figma or, you know, we're all used to signing up for SaaS, putting in our credit card and paying for stuff.
And so I don't think you'd need that much direction as a founder on how to create
You go set up a Stripe account and then, you know, it's pretty straightforward.
But it's most people have not purchased sticks or seven figure software.
And so it's a complete black box.
It's also, I think, scary as a result.
I've never seen it happen.
I mean, I know it actually happens, but I've never seen it.
So am I going to go do it?
And I think that this is what's tricky because if we get to the TLDR, how many massively successful software companies never have to figure this out?
I think almost everyone and it's funny because even if you're a consumer company, right?
Like Facebook has eight figure advertising.
Like, you know, it's like, it is really, really, really hard to make billions of billions and billions of dollars, $10 at a time.
And so I often think that one of the biggest challenges founders have is when they're transitioning from the $10 a month self sign up to how do we figure out how to sell big deals?
Usually the way I try to set this up from people that are just like ice cold on the topic around pricing or deal size is I asked them to think about how they purchase most products, which is to look at like three to five options, say it's stuff on a grocery shelf or say you're looking at hotel rooms, like, oh, I need to go to New York, I need a hotel.
So you like go to the site and they'll be like, you know, three to five options say,
They have different prices.
They have different features.
But you're sort of choosing between those small number of options and they're all, you know, yes, relatively similar.
This is how most people buy expensive software is that they're like, cool, I know how much this vendor costs and this vendor costs and this vendor costs.
a similar amount as a startup, and it sort of resembles the way the other vendors charge, the customer would be like, oh, that makes sense.
Versus when you're a founder and you try to price it in a totally weird way.
It'd be like if you were a hotel and you're like, oh, you pay with seashells.
We don't take money here.
You take a bath because this much.
If you only sleep on this half of the bed.
Like you're not going to make a sale, okay?
Like because you didn't take the time to understand how the customer is purchasing all this other software.
Even if those things represent your costs, right?
So you can have this fake first principles like, well, I'll just charge as a function of my costs.
Let me transparently show my costs off.
And it's like, what are you talking about?
And so I can't stress this enough.
understand how other vendors that your potential customer pay for or would evaluate, understand how they position and price and sell and just be like that.
Just make it so if they look at you side by side with the other vendors, you don't break their brain.
Well, and that's often how you get to make a big contract being a 20-person company, going up against a thousand-person company, because it's like
the customers buying the same thing and you're priced the way that and you can deliver the service.
You get to make more money.
I think another thing that happens that I find frustrating as a business guy.
I will put my business guy hat on.
I think developers like to sell developers.
And I think developers like to build tools and sell those tools developers who like to buy tools.
And I think that like that is the easiest construction of the world.
So I'm going to believe the world is constructed that way.
Corporate CEOs need to deliver revenue.
So I think there's like a massive disconnect, right?
The CEOs incentivized by their stock compensation to deliver revenue and increase the stock price of a company.
The developer wants to deliver tools and give those tools to the developer.
Out of those tools translate into more revenue for the company.
And I think there's two philosophies.
Philosophy one is that's the company's problem.
That's the vendor's problem.
I think that when you're philosophy too, you get to charge a lot of money.
I've heard some incredible stories about Palantir.
We have so many founders who used to be like Palantir engineers and like the economics of some of these deals.
It's like, we send 10 guys in to fix your thing and you pay us a billion dollars over four years because fixing that thing made you $10 billion and nobody cares how many guys it took.
If I get to make 10 billion, I'm happy to pay you one.
But if you're like, here's a tool, go figure it out.
And the engineers of that company can't figure it out.
So that company loses value.
You can't ask for a lot of money.
Why is this so confusing?
I think that the engineer mindset is to care how something works under the hood.
And the non-engineer mindset is that you could care less.
How it works under the hood.
You're like, I don't want to know how this works.
But they really care a lot about whether their outcome is achieved as quickly as possible.
If you're waiting for someone to perform a service for you, and they're late, and they want to give you a really long, complicated story about how there was traffic, or you're like, just like do the thing.
You don't want the details.
And so think about the way cameras used to be marketed.
versus the iPhone where it's like megapixels and like all the Japanese companies.
Oh, there's a new camera with this and that or speed.
Or like the way Max for marketed versus PCs specs, specs, specs, specs.
And so I just think it's different to sell a product to a solution oriented customer versus someone that really, really, really needs to know or wants to know how it works.
I like your vendor argument, which is like,
I'm not going to say that tools don't make money.
There are a lot of tools that make money.
I will say, if you're in a market where most of the vendors are selling outcomes and you're selling tools, that's probably a recipe for disaster.
The other thing that I will say is, I think there are a lot of companies that founders think are selling tools and they're not.
The number of times I've talked to a YC founder and they'll say, what AWS is tools, Stripe is tools.
And it's like, it's so interesting, unpack that because
When AWS is selling you as a startup developer.
This might be semantics, but here's what I would ask yourself.
Do these companies have large sales teams?
Are these sales people compensated on size of contract?
And do they have commissions and do they have quota?
Do their largest customers pay them tens of millions of dollars a year if not more?
And so all these companies would fit that bar.
And if those sales people are not talking to you,
That probably means that your experience of that product is not a representative experience.
Like signing up for Stripe for your self-service side project is different than being a very large and successful company that processes billions of dollars.
And it's trying to figure out should we switch off of Chase Merchant Services and strip off Stripe with our $3 billion worth of volume.
And I think that what gets people confused sometimes is that the brand of a story can often be built during the first couple of years when they might only be selling tools, and they might only be selling those tools to startups.
And the number of people I talk to who are just like, well, obviously Stripe is just a now more startups exist and more startups use them.
And I'm like, that's lazy thinking.
I think this brings up a related topic.
I know that some of the Sequoia folks put out like a bunch of content about selling outcomes versus selling software.
And to quickly introduce my understanding of the argument, it's the following.
The AI models make the value of code zero.
Anyone could crank out code.
And if you're trying to sell software, every time a smarter model comes out, the value of your code goes down.
Tools are getting cheaper and cheaper.
But if you're providing services, if you're selling outcomes.
And you're using the AI tools internally to produce the outcome.
Every time the models get smarter, your margins get better.
So you're like, oh yeah, we can deliver, you know, what do you want a widget outcome?
And every time a smaller model comes out, it's cheaper for you to make widgets.
That's positive feedback.
I'm not sure that's the right framework for literally every startup.
I think that's a stretch, but I think it's an interesting way to think about the difference between high value outcomes sales versus selling SaaS.
So I want to give you a challenge here.
So I think this is a question that can scare people as I'm moving from selling tools to selling outcomes.
You know, I'm imagining a world where I have thousands and thousands of customers.
How can I understand each of their businesses well enough to be able to promise them an outcome?
How would you unpack that kind of question?
Well, I would start with how the comparables or competitors in your space think about this.
And I would ask the customer, how do you evaluate outcome?
You know, this is like the classic phone of friend is someone asks, you know, you just ask the customer.
So I'd be like, cool, how are you guys evaluating outcomes and what does success look like and what does not success look like?
And I would basically get your customers to educate you on this one.
Embedded in a lot of startup founders' minds is a volume of important customers that I wonder whether that's actually true.
I'll pick on a company like Snowflake.
How many customers pay Snowflake over $50 million a year?
I don't know, but I don't think it's thousands.
And so I think that basically, one, I think it's a simpler problem than it looks because not all customers are actually unique snowflakes.
And probably things that work for one company industry would work for another company industry.
But I also think too, your biggest customers can get really big.
I've got a company that I funded and they do logistics coordination for commerce.
And it's like, you know what?
You know how many Walmart's there are?
There just aren't that many.
So like the reality is is that most of their customers
are gonna be big and there aren't that many big customers.
So I think that's another way that you can kind of unpack it where it's like, you probably don't have to solve this problem for a thousand.
I think the second way that I would unpack it is you might have more intel than they do because you get to operate horizontally across a lot of your customers.
You get to see how they're using your products to make money.
You get to see the other things that are doing it money.
You might have a better view on what's going on
What's funny is like you might not need to be an expert in their company.
You might need to be an expert in how people are using your product to make money.
And then you can communicate that to your other customer.
Is there an example of like an outcomes-based company that you like to reference an office hour?
The Palantir is like the obvious one.
I think the problem with Palantir is it so secretive that no one really knows?
We shouldn't explain this for you.
Well, what's funny is like all you have to do is talk to people who worked at Palantir about their individual products, like not what Palantir does, but just like tell me about one of your projects and then immediately you're like,
Oh, this general used this to kill these people over here and it worked really well.
And so to me, they're an obvious clear example.
And the second one that I end up hearing about a lot is whenever you talk to salespeople for the hyperscalers.
When the hyperscalers are selling other big companies, often non-software companies, it's a completely different conversation.
It's not like paper API call.
No, no, no, it's a completely.
And it's all these like services they're going to provide and like, oh, like you do this thing and we'll package our little thing here, we'll package our here and like we're going to develop what to you looks like a nice custom solution.
But to us is just picking up pieces.
I think Workday tried to do this.
It's like, oh, what is what's your HR process?
Our entire thing's flexible.
It can change as you grow as you do.
So to me, there are so many examples.
And what's frustrating to me is it's too easy to copy the tactics that make people $10 million, but that never make them a billion.
I think that's the thing.
It's like the number of funders to talk to, it's like, well, this company made $10 million and there is a Series B. If I just do what they do, then we'll win.
Yeah, you know, I think my advice in office hours about this, if I'm just reflecting over the years was I would always advise early stage companies to try to sell upmarket.
because it usually wouldn't work.
But if you try every few months constantly, every time you get a little bit closer to landing the big customer.
And so if I'm just reflecting on companies that I've worked with that ended up closing seven figure contracts, it's not that they showed up one day and they just got it, the first thing they tried is that they kept trying to sell a seven figure contract.
And then they changed something about their product or process and they tried again.
It's usually it'll take like a year or two to get to that stage.
But if they wouldn't have been hitting their head against the wall trying it a bunch of times, there's zero percent chance they would figure it out.
Well, and you bring up another thing that I think generates so much fear.
Dalton, you told me I have to grow seven percent week over week.
And now you're telling me it's going to take a year to figure out if I close this deal.
But if you set me up to fail, I should just still start up this software.
Why are you trying to trick me?
Why didn't you tell me it was going to be so hard?
There's a lot of effort that you have to put into things that may not work.
And it's kind of just part of the sale cycle.
And so you have to do both.
Hit the growth goal and try to build and sell things that won't be successful the first time.
And the way that I communicate to founders on this point is
In some ways, the sale cycle being slow is a gift because you can operate a lot of these in parallel.
Oh yeah, that person you're talking to, they're going to take a two-week vacation.
I think that like what founders often get frustrated by is like the mental load of keeping a big customer in their head causes them to be afraid of talking to many of them.
But the reality is the time isn't that, you know, if you got two week gaps between meetings, you can put more on your calendar.
No, that's a great point.
I'll sometimes be like, oh, let's pull up your calendar.
Let's see what, you know, and sometimes I look at them like, oh, I don't have any ideas, but sometimes there's a lot of blank spot on the calendar.
If I can give founders to think, oh, I'm hedging.
All these things aren't going to work.
Let's talk to 10 of them.
And we're learning, we can compare notes.
Once we're talking to 10 of them, if two of them are assholes, you know what we can do?
If we're only talking to one in their assholes, it's like, oh, we got to slog through.
But what's tricky is if you know this is where you're going to end up, I don't even want to tell you how to get there.
Just don't lie to yourself.
You're going to have to get here at some point.
And don't tell yourself this fake story that like, oh, Stripe, just sell software to startups.
That's verifying recalls.
Go chat GBT who has sales teams and helping the sales team.
I remember having a meeting with Andy Jassy.
It must have been like 2018.
And he was like, all right, Microsoft's finally in the game.
This year, AWS has to hire 5,000 salespeople.
And first of all, little old me, I was like,
How do you hire 5,000 anything?
Yeah, you're just casually.
And then he's like, I forgot the number.
He's like, Microsoft has like 120,000 cells.
He just said some number.
I went from being like, that's the most impressive thing I've ever heard to, oh my God, you have to fight those guys.
There's a deep hint in there.
And you know, Microsoft got to the party 10 years later.
And that was just in time.
If you have to end up here, don't be afraid.