🎂 Anu Hariharan & Nitin Rao Fireside Chat

Hello, welcome everyone. It's birthday week and we're celebrating 10 years since Cloudflare's launch and so I'm really excited about today's conversation.

We're doing a series of fireside chats with industry leaders we respect about the future of the Internet.

My guest today is Anu who's a partner at Y Combinator's Continuity Fund.

So thank you so much for joining us. Anu, really few companies have seen the Internet evolve and particularly interesting fast-growing startups evolve quite like Y Combinator.

The program's been around for about 15 years and backed just iconic companies across sectors like Stripe, Airbnb, Dropbox, and a number of companies that Anu has been personally involved in.

Instacart, Brex, Rappi, Fair, Monzo, Grow.

And so really, really excited to have Anu join us. Anu, I think the last time we spoke was quite literally 10 years ago and so I'm so grateful that you agreed to join us and we get to catch up about the last 10 years.

Well, thank you so much for having me.

I mean, it's 10 years is a great milestone. You know, most companies when they start out don't make it this far, you know, less than 1% of the companies actually make it this far.

So congratulations to the entire team at Cloudflare.

And you're right, it's been at least a decade since we spoke last and right before this conversation started, I was reminiscing how I actually was working class of 2009 and worked at BCG in Boston.

And most of my roommates were from HBS class of 2009 and I've always heard wonderful stories about Michelle and Matthew from HBS.

So it's really great to see their journey and how far the company has scaled.

Well, this should be a really fun conversation. After spending a lot of time at Andreessen Horowitz and Qualcomm, you helped run the Y Combinator Continuity Fund.

Would you mind just explaining what the Continuity Fund is and the kinds of companies you work with?

Sure, happy to. So Y Combinator, as you mentioned, is at least 15 years old.

It was started by PG, Jessica, Robert and Trevor with the real intention to help the first time founder or the founder that just graduated two years out of college and is trying to start a company.

So the mission for YC was always how do we help more founders build companies and help them build enduring companies?

So in short, if you wanted to think about it from a unique angle, YC is actually a university for startups.

And so the three-month accelerator program, which is the batch accelerator, we're pretty much the first check-in.

And we joke internally it's like a reversitution.

We get 15,000 applications, 150 to 200 companies, but these are founders, they need money to launch what they're working on.

And so we give them $125,000 for 7% equity, and that's the standard sort of reversitution, if you will, for every company.

And what's interesting about that is YC obviously did extremely well in the accelerator side.

As you mentioned, we have Airbnb, Stripe, Dropbox, Instacart, DoorDash.

But I think what really makes YC special is its founder community.

We have the best founder community, and it's kudos to the founder community and all the seeds that PG and Jessica laid at the early stage of YC's evolution.

You know, if you go back in your life, where did you have your best friendships?

College or school? And YC is that. You can't have any other place where entrepreneurs are that close friends.

And so the way YC continuity was formed, the growth fund, was that literally five years ago, some of the YC founders said, hey, we're staying private longer.

It takes 10 to 11 years. But really after that first journey, there is nothing like YC, but we all have problems, right?

So post product market fit, the company building phase, all the problems are very similar.

How do I hire execs? How do I onboard them? I'm a first time founder.

More often, this is my first job. So how do I, you know, literally hire for these roles that I've never managed or don't even know what it is about?

And so often they're talking organically with each other within the YC founder community or reaching out to founders who are two or three years ahead.

That was literally the genesis of YC community.

So, you know, we often say that if the YC accelerator is the undergraduate for startups, we are the graduate school.

So we run something called a YC growth program, which is essentially run twice a year.

We rebatch the CEOs.

So you have 15 CEOs per batch who are similar in scale. So pretty much most of them have around 50 to 100 employees.

And the focus of the entire program is that company building.

How do you scale as a CEO? How do you hire and manage execs?

How do you do performance management? And we also touch on financial planning and fundraising.

So that's one element of continuity. The second is, of course, the fund.

We also invest in growth stage companies, primarily focused on YC companies.

So we are, we come in essentially series B and above. We write check sizes anywhere from 30 to 100 million.

You know, I often say if we do our job right, we are doubling down in the best YC companies, pretty much at the phase where they've figured out product market fit, but are truly raising money for scale.

So they have good performance, some science of a business model, and now they're really focused on scaling that into a multi-billion dollar company.

And so I want to talk more about the startups evolving themselves.

Maybe can you talk a little bit about the relationship between YC and the investors who would traditionally be in writing those checks?

Does that change the dynamic with investors?

It actually doesn't at all. So if you look at it, you know, YC, the batch, when the company goes through the batch, it's essentially pre-seed, right?

And on demo day, we have around 2000 investors who attend.

And so YC continuity doesn't do any investments at demo day post-seed or even the series A.

The series B usually is at least three or four years old.

And if you look at growth stage investing, it's usually at least two to three investors per round.

So in fact, I can say like we've done about 24 investments to date and pretty much in all of the 24, we had at least one other investor who was involved in the round.

So first of all, it's not zero-sum game.

Second thing I'd say is, you know, as companies stay private longer, the number of investors that could write a hundred million dollar check, even to this day are far and few in between.

And if you lay it on top, the number of those investors that actually understand startups and what that, you know, will be patient in terms of their ups and downs is less than 10 on the growth stage.

So continuity, our whole mission is, you know, we are founded, YC is founded on the principles of university of startups.

It's more, let's help our founders build more enduring companies.

So we, of course, are around startups and we are playing, you know, a portion in the ecosystem on the growth stage.

Yeah. I feel like I have a biased perspective going into this question because of my time at Cloudflare, but just like looking at Twitter, it feels like, I kind of wonder if we as an industry have grown up a little bit where, you know, the conversations you used to be entirely about sort of startup in a garage and now you have folks like deconstructing S1s and talking about very specific metrics you need to get better at.

Are we talking more about the growth stage than we used to? I don't think so at all.

I mean, if you like, this is what I often say at YC, you are so close to ground reality, right?

Because we, the early stage accelerator gets at least, you know, 400 to 500 startups a year, every year.

So, you know, we funded 2,500 startups today, but we add, you know, close to 400 new companies every year.

So through their eyes, we see two things. One, what does the future look like?

So you pretty much are getting a view of what the next 10 years will look like, but just, you know, if you just watch Demo Day, you get a feel for it.

And then you also see what it takes to start a company even today.

So you realize you're close to like, what is the hardship?

There's still a lot of hardship involved. Startups are not for everyone.

I think you either want to be a startup founder or not.

It's that binary. It's not for everybody and that's okay. And so even though you may see, like Twitter obviously has more users and is a much stronger medium, and there's obviously tech is, you know, a huge player in this ecosystem, right?

And it's shaping and taking more share of the global GDP or the global market cap, if you will, that obviously it's the talking point.

Like if you look at, you know, 1918 versus today, Spanish flu versus coronavirus, there's no doubt in the pandemic that tech as an industry has helped us function better than we could have ever, right?

Zoom was able to scale to another hundred million without any of their systems breaking down.

I'm sure they didn't test for it at that point, right?

But you just lived through it. So therefore there's more talk about tech, but if you go to that startup founder who's starting a company today, some things are easier, but a lot of the struggle is real, is very real.

It's still a struggle.

So what are examples of, so you're on the board of companies from the United States, India, London, Latin America, what's similar and what's different in the kinds of struggles that you see?

Maybe we could talk a little bit about that.

You know, my partner, Michael Siebel, sees this really well. He says, like, if you want to be a startup founder, you should be ready to get punched yourself in the face every day.

And that's absolutely true. Whether you're an early stage, growth stage, U.S., non-U.S.

founder. So if there's one thing I'd like you all to take away is that, are you ready to get punched yourself in the face every day?

Because there's never a day where there's only good news. It's usually an outlier.

You have a mix of good news and bad news. So what does it look like in the very early stage?

In the very early stage, first of all, you are pretty much giving up whatever that is you have to work on a problem that you think can be a good company.

So I'll give you a few examples of this. Strike. When Patrick and John started the company, today you can all look and say, oh, wow, it's a $35 billion company.

They made it. But when they were starting off, Patrick dropped out of MIT.

Is that a decision you take lightly? No. I mean, what if it didn't work out?

Today it worked out, so it looked good. But he was ready to make that leap of faith and say, no, this is what I want to do.

And I'm willing to drop out of school for that.

And John, actually, when he applied to YC, I think was below 18 in his first company and hadn't even finished high school, if I remember right.

And so there was a little bit of concern as to like, hey, should we at least get him to finish high school?

So these are not risks. It's easy to read a story and say, wow.

But when you're going through the moment, these are difficult decisions you're going to have to make as a founder.

And you're putting everything that you have, all your eggs in one basket.

But they had an idea. They had been following Internet payments and Internet penetration.

And they wanted to power payments.

I mean, their whole mission is improve the GDP of the Internet. So therefore, I think that at the early stages, it's about having an idea, building a product, and then how do you get the first 100 users?

And not just any 100 users, but 100 users who love your product.

And that takes a lot of iteration.

So in YC ecosystem, since you have a lot of other companies, B2B startups especially do this.

And Stripe, we used to refer to this as the call us and test.

They literally would sell to companies in their batch and say, hey, what would it take for you to sign up with Stripe?

And why will you stick with Stripe?

Or why are you not sticking with Stripe? And you sort of use that and learn that.

So let's fast forward two years later. When you have product market fit, you're almost a little scared.

Because what it means is your product is growing like fire, which means many things are breaking, right?

Maybe your systems can't handle it, your website crashed.

Like one of the things I've seen all these huge partners talk to our companies is, are you launching tomorrow?

Do you know you can handle the load?

And often founders are surprised by that. What do you mean I can handle the load?

They're like, you may get shut down tomorrow. Because maybe your systems are not designed in a way that it can handle.

So I just think like, okay, you have product market fit.

Then you say, you start approaching 20 to 30 employees. And all of a sudden you're like, I need to hire, do first senior hire relatively as head of engineering.

And it's a fascinating map that I've walked through with the YC founders.

The founders are technical themselves, but they're not people managers.

More often than not, the YC median age CEO is like maybe 27 or 29. And often it's their first job.

And so they've never managed anybody before. And it's like, who is this head of engineering?

What are they supposed to do? How do I figure that out?

So you have to have the ability to learn and go and talk to maybe like 10 best heads of engineering in the Valley, figure out what do they do in their day-to-day job?

What makes them good? Come up with your own spec and then interview for them and then close them.

Because why is the best head of engineering leaving their job to come join you?

Right. And so you've got to find a, you have to have a compelling pitch of crystal clarity of thought where your business is building.

And then often the hires don't work out. There's nothing called learning from mistake.

There's nothing better than learning from mistakes, right?

And even though you can reduce the number of mistakes by talking to your peers, you're going to make mistakes.

That's how you learn. This is the first time you're doing.

And so the speed with which you move also matters. So I told already three things, right?

Clarity of thought, pace with which you learn, the speed with which you course correct.

So therefore entrepreneurship is so hard.

And now that's hard in general in the U.S. Now let's go, for example, to India or London.

They don't have 10 heads of engineering. That's scale to start. It's a very young ecosystem.

Who are they going to talk to? Who are they going to hire?

So I remember having this conversation with Binny at Flipkart because Flipkart went through this pain.

And Binny was like, yeah, it's great. Everyone told me to hire scaled execs.

And he was like, where is the scaled exec in India?

And we are sort of the first to sort of be the scaling startup. So they had to change their playbook and adapt to how do I grow my leaders to become scaled exec by getting them advisors from the U .S.

or mentorship from other scaled execs in the Valley.

So you not only can hire for scaled execs, you now have to find peers or mentors for them in the Valley and use that.

So that's the added complexity of scaling a startup outside.

But fast forward 10 years from now, I do think entrepreneurship is global.

You're already seeing signs of that. 27% of YC startups are headquartered outside the U .S.

And I'm willing to bet that in a decade, at least 50% of YC startups will be headquartered outside the U.S.

And so I think the sheer nature of, A, the Internet democratizing information, more companies being global like Facebook, Google, Uber, talent is everywhere.

I do think you will see multi-billion dollar companies coming out of other regions.

Yeah, it's really exciting that there are interesting companies being built all around us.

And that changes the, how those, but how those struggles, so some of the struggles you described feel like they would be struggles at any time.

Like hiring has always been difficult.

But what is different now versus say five years ago? Are the struggles different or maybe exactly the same?

I don't think the struggles are different.

I think entrepreneurship as a journey, you go through the same struggles.

Well, there is a difference in first, the CEO hiring for the first time, a set of five execs and getting the exec team to work together very well.

Now, as they scale to the second act or the third act, like 10 or 15 years, they've already had the skill of hiring and managing.

So they get better and better at it.

But the first time you do it, it's really hard. So when you look at the data of YC companies, one of the reasons you see post-product market fit, why do companies fail?

One of the biggest reasons they fail is because they hit the zombie mode where they have not figured out how to scale themselves and they become a roadblock and they haven't had an exec team.

And the second most important reason they fail is as a result of the zombie mode, they move farther and farther away from customers.

Is there a specific leading indicator? What do you look for that's the first warning sign that you're headed for the zombie mode?

Yeah. So do-it -yourself CEO, this is the classic.

So the first stage of the company, CEOs are do-it -yourself CEOs, which you need to be because only then you have that astute product focus, really figure out what does it take for this product to be in high demand.

But the moment you start hitting 20, 30 people, and if your hired significant execs, you start seeing a lot of things fall apart.

First of all, when you start doubling employees, processes will break.

So going from 25 to 50, okay. 50 to 100, 100 to 200, everything starts falling apart.

And that's usually because you haven't hired really strong execs at the top who can come and put processes in place that helps move the organization forward.

Second, you see shipping velocity fall dramatically, like dramatically falls off the cliff.

And I've seen it with some startups.

And by the way, most startups that are doing very well, they do go through one or two years of hardship.

It's not as though you can escape that. But you can see in the 12 to 18 month window, like nothing shipped, like literally nothing shipped.

That's usually a telling sign because either planning fell or they missed all the milestones, and you can start seeing that.

And then the third you see is therefore the CEO sort of not having the clarity of thought on what it takes to get this company to the next act.

So there are CEOs, there are two types of CEOs.

I think one type of CEOs are, they probably have crystal clear clarity of thought.

They're very rare. They have it as early as the first year of the company. They don't have exact financial plan, but they will say, here are the 10 suite of products in this arc, and this is how the company will evolve.

And whether they pick these two products or these products changes, but they have a very clear clarity of thought on what that is and what they're building and why it's going to be 10x better.

Those are very hard to come by. They come once in a decade, actually.

Very few founders have that. I've seen that in the Stripe founders, I've seen that in the Brex founders, but very few founders have that.

The second type of CEO, and there's nothing wrong with the second type too.

The second type of CEO is, they're working, they're trying to solve a problem which they themselves encountered, and then they're building it up one bowling pin and another bowling pin and another thing.

And that's still a big task. And they just peel each layer of the onion as they go.

And that's still a great way to build. The third type, which is the zombie mode, who is not scaling, also gets too caught in the details that they're not able to see the big picture.

And so when you don't have crystal clear clarity of thought, how are you going to drive an organization of 100 to 200 people behind a mission?

Because at some point as founders, I think they start realizing that people are no longer coming to work for me, they're coming to work for the mission we've set up.

And so you need to have that clarity of thought in where you're headed.

So I know we have about 10 minutes left. I'd love to touch on a couple more topics.

Can you talk a little bit about the relationship between these startups and the big Internet giants?

So how their suppliers, their partners, their competitors, I guess that's where they're recipients of ad dollars.

What's that relationship like?

And how have you seen it change over the years? Yeah, this is going to be somewhat of a boring answer, but this is the reality.

So I'll state it as is.

I think in startups that we work with, like the CBCD, honestly, they can't spend any time thinking about these Internet giants.

There's no time for that. They are, you know, maybe they're solving, they started off solving a problem for a thousand users.

If it's on B2B, you know, let's say a long day, let's say we started with 10,000, it's about going to a hundred thousand.

And then the next step is how do we get to 300,000?

In many cases, that's still like, you know, for example, Gusto, they have 1% of the market share.

They provide payroll software with healthcare insurance.

Should they be sitting and thinking about ADP and Intuit? No, right? They're barely scratching the surface.

It's well on path to be a big business, but I don't think they spend cycles every day thinking about that.

What you do do is you, you know, CEOs really do spend time doing this one year or two year strategy docs.

And a lot of CEOs actually, they refer to this Hamilton Helmer, Professor Hamilton Helmer wrote this amazing book on seven forces.

And so they use, they try to use that framework and identify what are at least one or two of those forces that this company has that provides differentiation.

So in that context, you look at your own product and figure out what are substitutes, what are compliments and what is it that's going to be different or more for your company as you build.

But I don't think anyone spends time thinking about what's Facebook doing, what's Google doing.

And in fact, at YC we teach them, do not focus on your competition, continue to focus on your users, talk to your users.

If your users are going to leave you on the pavement for something else, that means you didn't build something great.

And so try to figure out how your product can be 10X better, right?

And if you do that right, more often than not, you're going to be fine.

It also feels like we're looking at the, have the sectors for the YC Continuity Fund changed?

Like where you're not just competing with Google and Facebook, you're competing with ADP and you're competing with General Motors.

So it feels like technology is sort of emboldened to go after a different set of businesses.

How has that mix changed? Yeah. So I think that, you know, Marc Andreessen said this, which was software is eating the world and tech is no longer just about tech, right?

Tech impacts every industry. So I'll share this about this company called Spare.

It's a B2B marketplace that connects brand makers with retailers.

Think about Allbirds, Glossier, Swell Water Bottles, you know, and they help local independent retail stores to source inventory.

It's a B2B wholesale marketplace.

How big is the market opportunity there? $16 trillion in the US alone.

And everyone talks about consumer e-commerce. Consumer e-commerce, you know, in April was like 27% penetration.

B2B wholesale is 9% online. 49% of transactions still happen via phone and fax.

And so Spare is essentially bringing that online, right?

And then you look at Convoy, which is B2B trucking marketplace.

The trucking industry is $800 billion. Brokerage alone is $160 billion. And all Convoy is doing is automating it, bringing efficiency to the system.

In brokerage, you have hundreds or, you know, 500 brokers, you know, looking at a spreadsheet with 200 rows and calling a truck driver to see who would take the load for a shipper.

All Convoy does is matching and that's automated to make that system more efficient.

So the reason I'm sharing this is people have this perception that everything is a zero-sum game or that, oh, we are already at peak Internet penetration.

Absolutely not. The global market cap is like, if you look at it, $85 trillion.

Less than 10% is e -commerce. Internet-enabled businesses is $8 trillion.

So even if you play this out, you know, for another 20 years, we should, we have, you know, Internet-enabled businesses should be at least $66 trillion.

So we have a lot more to go. And I think the zero-sum game that investors tend to think often, where we've gotten it wrong, is it's the, most of these Internet -enabled businesses are expanding tan.

So take food delivery for example. Everyone thought it's Uber Eats, right?

No one else is going to win. But here we are, we have DoorDash, we have Uber Eats, we have Postmates, we have a bunch of food delivery players in the US.

So what happened? Because the delivery market was so tiny, the takeout market was 70 billion.

And there was a long tail of restaurants beyond that, that were not delivering.

And all of a sudden DoorDash put all of them online.

And so I think it's very, it's very dangerous because patent recognition teaches you to think of it as a zero-sum game, and it isn't.

So to your point, yes.

So continuity is a function of what the YC top of the funnel pipeline looks like, right?

So we have 2 ,500 companies that spread across multiple areas.

And we are seeing a lot more in B2B wholesale, in financial services, in ed tech and so on.

That's great. Where, it's so terrific that you get to see really this breadth of companies and support them to, I guess, navigate around the zombie phase to instead be really successful and increasingly a number of those companies on the path to going public.

You spent a lot of time as an engineer at Qualcomm. How are you drawing on those, yours as an engineer in your current role?

Yeah, if you had asked me a decade ago, I don't think I've ever said I wanted to be an investor.

I didn't even know what investing was. And I don't think I was, I mean, I never knew much about it.

I actually started my career as a software engineer in Qualcomm.

And one of the things over two years that I got a reputation internally around was I loved debugging.

And, you know, so there was a joke that if there was any bug, at that time we were building video streaming solution integrated with the WCDMA stack.

We didn't even have an app, right? This was pre-iPhone.

And so people used to joke, the software engineers used to joke that, hey, if there is a bug in any part of the world, just deploy Anu because she likes going into the rabbit hole.

And that's probably the best way to describe me.

And so often I look at what is it that I learned? Like I love when we don't know the solution to something and really find the root cause.

So, you know, post business school at BCG, I did a lot of private equity diligence.

And so that was my first exposure to investing.

And I remember evaluating this diamond mine. It was such a fascinating case.

And we had to advise whether they have to buy the diamond mine or not.

And that hinged upon what would be the price of diamonds. And so we had to study all these long tail of supply of diamonds and supply of diamond mines and how many such mines are there.

But the point is the process of debugging, which is like come up with frameworks, but really figure out what is the root cause is very similar.

And that was the skill set. I think that really helped not knowing any of those industries, but I had used it for figuring out downside risk because PE firms tend to really look at we need to protect our downside.

They're not necessarily playing that much for the upside.

And so, you know, that was my skill set.

And Andreessen Horowitz actually was quite intrigued by that skill set.

And that's why I got hired, which is the allowed my diligence process. But two months into A16, I remember Mark Andreessen pulled me aside and he said, you know, most people who join the firm are always biased to say yes to most investments.

And I often have to tell them, you know, try to find a way to really pick the good ones.

He said, you're going to be biased to say no, because that's how you've been trained on the private equity side.

He said, I want you to use the same process, but find a way to say yes.

And so use the same process. And so the thing is, and the learning there was look, mistakes of omission are your biggest mistakes as an investor.

If you make a bet and the company for some reason doesn't work out, you lose maximum one X your money.

But if you missed that 10 X investment, you missed the chance to return the fund.

And so, you know, we often joke about that.

So you should really measure, it's not even a joke, you should really measure yourself by grand slam misses.

And so now I put 70%, I tell my team as well, that if you're putting 70 % of your effort building an investment case, you got to tell me 70% of your effort went on building the upside case, because the number one mistake we do as growth investors is estimating the upside.

And so if we don't estimate the upside potential, right, we are not going to invest, right.

And so even if it's a 10% probability, do your work to really understand what if things go right, and maybe two out of the 10 things the founder said, which they haven't implemented yet, but works, right.

And what's even for 5% of their customers, what does that do to the business?

And it's fascinating when you push your thinking in that direction, that you really start to see things that maybe others don't.

And so that's sort of how you, I would say that's the process that I've used to sort of tailor to my investment side.

That's great. Well, it's so terrific that you're able to both have the sort of, you know, self-awareness to be familiar with sort of where you're coming from.

Maybe just to wrap up, what are you most excited about the next several years and everything the Continuity Fund will do?

Yeah, the next 10 years, I think it's going to be a great time.

People think that we are at the peak bubble, lots of tech startups, but they have no idea how many more is going to come.

You know, so far we keep talking about $10 billion and $30 billion businesses in tech.

I think that's soon going to split into, let's talk about the $10, $30, $70 billion businesses in healthcare, in FinTech, in retail and consumer.

And this is just the beginning, honestly.

And I think people are going to be shocked how much tech is going to change every sector.

It's great. Well, it's terrific that you're, so thank you for spending time with us and yeah, we share your optimism.

Thanks so much. I know this has been a ton of fun.

I appreciate your joining us. Well, thank you for having me and happy birthday, everyone.

Thanks, Anu. Take care.