This is Dalton Plus Michael, and today we're going to talk about the startup problems that money cannot solve. I can't count the number of times I'll talk to a founder and they'll say, well, we have a competitor. They just raised a big round. I'm freaked out. They're going to have all this money to do dot, dot, dot, dot, dot. And I always love these conversations because my starting point is always, oh, that competitor is scary. What about the incumbent in your space? That's a public company with a couple of thousand people and infinite money comparatively. Are we afraid of them? Like, didn't we start this with them there? This idea that we can convert money into success, our industry would be so much more profitable.

They have the money.

Exactly. Exactly. So we've made the high level point, but maybe we should go into some of the details.

Yeah, let's enumerate some of this, because it's often the case, hey, I'm guilty of this too when I was a founder, where I'm like, man, once we raise this next round, we're on easy street. We can just like throw money at this problem. And like, no, there's no more problems. And the exercise I would do, with office hours with a startup is to be like, oh, let's break it down. Let's enumerate. What are the problems? What are the bottlenecks in your business that you can throw money at that will be solved? And so kind of the goal of this video is let's just, let's go line by line about problems that more money doesn't actually help you solve.

I love it. So Dalton, when I try to sell customers my product, they don't want to buy it.

So the most problem, of course, with any startup is making something people want. And sadly, more money in your bank account does not make people want your product more. But, but, but, uh, advertising, uh, marketing, uh, billboards, those might lead some to some top of funnel. But you can't make someone want something that they don't want. No amount of money does that like we're all like the wearable things that people all the like bad hardware. So no amount of money made people want to use those things.

I mean, I'll go a step further. If you've got a bad product and you're spending advertising dollars on it, you are wasting those dollars. I almost guarantee you are not making more money than you're spending on that advertising. The only company that's winning is Facebook.

you're deluding yourself to, you're actually hurting yourself and if you didn't have the money, because you may be faking yourself that you think people want your thing. Like if you're dumping tons of money into Facebook ads, you're like, oh, we're growing, here's our graph. But then if you plot the graph against your burn and it's the same graph, what are we learning exactly? Invest in Facebook, that's what we're learning.

And your company is going to die.

So competitor, now that we have this war chest, Oh God, the number of times like, well, we can buy, we can make some acquisitions or we can buy this fancy exact, you know, we can compete with this competitor better.

Again, sadly, the way that you win against a competitor is to be growing faster than them and to have a better product. And that anything that's a distraction from growing faster than them is probably not the panacea that you hope. We have lots of companies on both sides of this particular debate over the years where they're either the underdog or it's the company that's raised more. And yeah, money doesn't really fix that. You don't just win by fiat when you raise more than a competitor.

You know, it's funny, I was talking about work day the other day, work days an older company. It was interesting because this founder was basically telling me the workday product absolutely sucks. And it's like full on it sucks. It's the worst product out there. And what was so interesting is I realized at this moment that this founder was a startup founder and had no context for what the customers of Workday want, what they're looking for. In fact, almost everything that this person hated about Workday was a thing that Workday's customers liked about Workday. The things that he cared about, like nice UI, the Workday customers did not give a shit about. I think what kind of blew my mind when I was thinking about this was just like, oh wait, you want to spend money to make something better and you don't even know what the customer wants to buy. Like this will not work out. Like your imagination of what the customer wants not correct. And so oftentimes when I think about this spending money, I mean, how many times do we tell people don't spend it? Cause it's like you, you don't know how to convert it into value.

Dig yourself into a deeper hole. It's actually going to be harder to course correct if you spend it on the wrong things. Like spending money on the wrong things and then stop spending it...

It's like so hard.

It's like being unaddicted to something, you know, you're like, wait, you already, You got used to it. Like, oh no, it's much harder to get back off of it once you've been on it.

What about execs? That's a common place to spend more money. My CRO is going to change the revenue director of my company.

Again, it's certainly possible, but more money alone does not mean it's going to work. If anything, if you're tempted to start hiring these people before you're ready, it's value destructive. Hiring executives ahead of where you need them is notoriously value destructive. And let me extrapolate this a little bit, because you might be like, well, Dalton, whatever, you guys are making points, but hiring is one. More money means you can hire more people, right? And I have a nuance point to make here.

Certainly having more money is good in the recruiting pitch on why they should work there. If you're like, hey, we have $10 million in the bank versus a million, I think a job candidate wouldn't want to hear that. Also, if you're like literally going broke and you don't have enough money to hire someone, that solves that issue. But here's the very nuanced point is that if it seems like you have a lot of money, you might be tempted to recruit candidates who are entirely mercenary, and all they care about is their cash comp, and they don't actually care about your startup and mission.

And so instead of bringing in people that are really aligned with your vision, being aligned with what you're trying to do, you're just like throwing money at getting people to work there, seeing a lot of that not work.

The other thing that I see with hiring is I see hiring by spreadsheet. We have money. Manager says, I need a team of N people to do things. You add N people to the headcount spreadsheet. The math works out. That's the end of your oversight. And then the manager hires eight shitty people.

Yes. And like the machine, you're like, you put money in the machine and what pops out is like Not quality.

Not quality. Yeah. But the money spent.

The money spent.

And so it's interesting because it's like, well, if you wanted to spend that money on hiring, like, did you care who was hired? Were you following up? Were you interviewing them? Were you involved? Oh, money doesn't do that stuff. The money can't buy your attention. And so that's another area where it's like, oh, it's so painful to see. It's like, oh, I just need three sales pods. Just spend $2 million. You have these three sales pods up, and then our enterprise sales is going to work. It's like, no. No. I'm sorry.

Let's think of a culture. Because I think that's one that's a tricky one.

Because with hiring, this is actually the way money can help with hiring is if it increases the chance you build a culture that people want to work in, in a place that people want to be a part of. And so if the money goes to your bank account and somehow we could draw a line to working at your company is awesome, then okay, thumbs up, that makes sense. I don't know, maybe having a nice office or something. Okay, yeah, that's check, you got it. But go ahead, talk about the culture a bit.

One of the things that I see a lot is that you can spend a lot of money on your office and on your perks and so on so forth and still have a culture where the average employee doesn't care whether you win or lose. On the flip side, you can be running this company out of a class C basement and have a culture where every employee comes in every day and wants to kill it. And so certainly it helps to pay people a livable wage, right? Certainly it helps to get people health care and so on and so forth. But I wish that there were ways kind of above the basics that you could actually get a multiplier effect by spending more money. And unfortunately, I haven't seen it. And I think the other thing when it comes to hiring is that you might be able to delude yourself in how good your product is, your employees, they're a little bit less biased. And so even if they come in super hype and super excited, three months in when they're interacting with customers, when they're looking at the product, when they have more intimate knowledge, they know. And money doesn't, oh, well I'm really well paid, so I'm just gonna lie to myself and tell myself this product's good. It doesn't work that well. What about focus?

So, focus is really important. When you're at the earliest stages, you're forced to focus. And everything we taught people at YC was focus, focus, focus, and it works. And you would see people fall off of that once they got a bunch of money. Because it suddenly became possible to do multiple things at once To hedge and to hire enough people to like Yeah, just do a bunch of stuff and counterintuitively this tends to not work and it tends to be counterproductive to lose your focus.

It is so painful to watch a founder hedge because like you will inevitably in an off-sour there'll be like those there's always one thing they're the most excited by. And inevitably in a company that's hedging, they're putting less than 20% of their effort on the thing that they're objectively the most excited by. And he talks about why. And it's either like, oh, well, we have these other things that we can't stop working on. Why not? Like it's embossing you? Or it's safety. I don't feel safe not working on three things at the same time, which always confuses me. Cause I'm like, you have a limited number of great people. You have a limited amount of attention. You have a limited amount of time. Why would you dilute those things? Like, do you, are you safer? I understand you feel safer. Like, are you safer?

I always encourage people, it's like, I don't mind experimenting or hedging seriously, right? Like you learn something and then you adjust and you iterate. But man, it's really hard to be learning on three different parallel things, especially, I mean, what's interesting is that way later than I would have thought, I think hedging is hard. Even companies generating a billion dollars in revenue, I see situations where they're...

Maybe the way I would riff on this is it's big company, Idis. If you bring big company, Idis, the earlier you get that way, the worse. And it's very hard to go back. Once you get a case of big company itis in your startup is very hard to ever get it back out. And so you want to keep that out as late as possible before that starts to seep in, right?

Yes. And this is one of these weird ones where I think hedging is a common thing that screws big companies and you're trying to...

You're copying the exact wrong thing.

Yes. You're trying to bring that infection into your company like really, really bad.

Why should someone raise money? Okay, you guys are enumerating all these like horror stories. Maybe I should just, you know, raise a million dollars and never raise another dollar. Like maybe that's the right thing. Why isn't that the right call?

So I'll start with the depressing thing. There are so few situations I see where a company is actually doing really well. I think that's like not talked about enough that it is somewhat rare that a company is significantly helping customers and doing it in an interesting and kind of good way. And I think in those scenarios, there are often a lot of things that money can help with. Like one, that incremental hire oftentimes is extremely helpful. Two, marketing. When you're telling someone about a product that's good and predictably if they know about it, they'll try it and they'll start using it and they'll like it and they'll retain. That's very, very good.

Yeah, maybe riff on that. I think that's exactly the point. Is I think about this in terms of payback periods? Where if you have the machine working really well, you're like, oh, our customers pay back in 10 months. And it's like, we know this for a fact. We have so much data. We are totally convinced we have a 10 month payback period. Then you should raise every dollar to do that.

But I'll even caution on that because I work with a number of companies where they would say, Their payback period is 10 months because the person signed up for an annual subscription.

No, no, it's there's too many asterisks. Yeah, I hear you.

At 10 months when you've working even the customer, the customer loves you. Can't imagine their life without you and will pay you indefinitely, then incredible.

And the other one I would make is just, I think it's an important milestone. If you want to build a big company that goes public someday, there are rounds of funding and they're just like core economic things that if you're sophisticated are part of doing it. But I would think of them as a trailing indicator that you're doing awesome and not the goal itself. Like it's like the good-harding thing where people are turning fundraising events into the goal as opposed to, oh, we're doing amazing. This is a side effect of doing amazing.

Yes. I'll throw a couple others in. I think that once you have a machine working well, there are forward investments that you can actually plan for that can create significant value for you, right? And I think that fundraising can help.

So I'll give an example. Tell me if this is too messy, but Uber comes out, it is working on black cars. It invents this space and then Lyft comes out and it is working with normal people's cars and normal drivers. If I'm Uber in that position, it's kind of like, oh, I understand the space is great. I understand that's maybe a better model that I want to iterate towards. If I want to raise money to help me get there. I know a lot. I'm doing this as a very intelligent investment. That makes sense.

Another example is DoorDash getting its first 12 markets profitable and then being like, all right, we understand how to sign up stores, how to do promotions, what types of markets to go to, let's go do our next 50. Okay, like those types of intelligent investments, when you actually have some expertise, when you have an aggressive amount of proof that your customers love the product, awesome.

Yeah, awesome. To be super direct, what we're saying is hand waving. Oh, we have $10 million. We're gonna like hire some people and we're gonna do some billboards. That is hand waving versus the examples you just gave are super precise and specific. And I would just encourage the viewers to delineate between those examples. How specific are your uses of capital?

I want to throw in a last cautionary tale here. I think there's two things that founders don't realize when they raise capital and they're not in this position. One is more often than not they bring on a board member who thought the company was doing better than it is. And then they have to interact with that person quarterly.

I cannot tell you how often I do office hours where a top two stressor in a pre-product market for CEO's life is the fact that they have an investor board member who doesn't like the company. And as much as I tell them those are words, they can't do anything yet, it's just hard to have a negative cheerleader as a significant shareholder in your company. It's not fun. It's hard to not have a little bit of a respectful, like You want to see them as this aspirational, helpful, and they're kind of like, oh, I fucked up investing in you. That's not fun.

And then the second is how employees' expectations change when there's a lot of money. I cannot tell you how many YC companies I talked to where the founder knows the company is not doing well. And the employees think because Sequoia gave them $20 million that they are. And they start treating the company like it's Google. And like when people think the company has made it, they actually start thinking, how can I get mine? Whereas when they realize the company hasn't and they believe in the mission and the team as a good culture, they think about how to sacrifice for the company. And the worst case scenario is you have a bunch of people in your company who are trying to get theirs and your company's not working. Good luck. Good luck. Money, hell, that's not a problem that money doesn't solve, it's the problem money creates.

Amen. I mean, look, I think my parting thought is my suggestion is to treat money as a tool, if you're a startup founder. And you have a whole box of tools. There's lots of tools that you have. Lots of tools. And there are certain types of problems that you can use this tool to fix or to hack. And if you're very good, if you're good at using this tool, good for you. Like if you're good at fundraising, hooray. But it is not in itself the answer. It is not the panacea. And if you start hitting everything with a hammer, right? If all you have is a hammer, if all you have is money and you try to fix every problem with it, it's not gonna work.

Not gonna work. It's so funny because sometimes I think to myself, The kind of theory behind startups is that ambition, intensity, intelligence, and scarcity of resources is a better environment for invention. Big companies pretend they can create that, but it's really hard for them to do, but startups can create that. It's interesting when people want so much money that there's no scarcity, yet they still want invention.

I just think if I could bottle up what I've seen the best companies do when they're low on cash, and if I could put that into a pill. Man, the gun to your head when you're low on cash, that creates so much more invention than the six months after you raised that round when you're like, now we can spend money on things.

It's a gift. It's a gift to be resource limited when you're, when you're early.