Zach Perret: Why ‘Founder Mode’ is the Most Dangerous Blog Post for Founders | E1215

Intro (0s)

• The blog post being discussed is considered one of the most misused and is believed to cause some of the worst behaviors in startups over a long period. (0s)
• There is a critique of the idea that startups should operate like manufacturing companies, as software development is fundamentally different from manufacturing. (7s)
• Raising money is viewed as a significant waste of time, and there is an effort to raise funds as infrequently as possible. (11s)
• Angel investing is seen as a distraction for founders. (15s)
• Zach expresses excitement about participating in the discussion in person and appreciates the opportunity to join. (31s)

What Triggered Plaid’s Recent Growth (52s)

• In 2020, the company signed paperwork to sell to Visa, but U.S. regulators investigated the deal to determine if it would create a monopoly. During this period, the company experienced significant growth, partly due to the impact of COVID-19, which led to the decision to walk away from the deal. (1m7s)
• The primary concern for the company was whether joining another company would limit their long-term potential and impact, rather than just focusing on the financial value of the acquisition. (1m51s)
• The decision to sell to Visa was one of the hardest decisions made, involving discussions with the leadership team and personal reflection. Initially, the decision was made with a slight majority in favor of selling, but a year later, the decision to walk away was much more certain due to the company's growth and the increasing importance of digital finance. (2m30s)
• The company did not build new products because of the acquisition; however, a mistake was made by launching three new business areas simultaneously. (3m43s)
• Transitioning from a single-product to a multi-product company is extremely challenging, particularly when launching multiple new business areas simultaneously. It requires balancing sales resources, rebranding, and communicating the expanded offerings to customers. (4m3s)
• The analogy of a snake digesting an elephant versus digesting three sheep sequentially illustrates the difficulty of managing multiple major product launches at once. It suggests that handling one or two new products at a time would be more manageable. (4m33s)
• The first aspect to break during such a transition is the go-to-market strategy. Product teams push for their products to be prioritized, leading to internal competition and complexity in sales processes. (4m53s)
• Sales teams face challenges in explaining and selling new products, often requiring the involvement of product specialists and technical account managers, which complicates the sales model. (5m22s)
• The simultaneous expansion into international markets and moving upmarket with sales efforts further complicates the transition, highlighting the importance of sequencing in managing such changes. (5m45s)

Are Great CEOs Defined by Resource Allocation? (5m53s)

• The discussion explores the idea that the best CEOs are often the best resource allocators, particularly in the long term, although this can depend on the business's horizon and scale. In the short term, finding product-market fit is crucial for founders. (6m6s)
• In the early phases of product development, a small, versatile team, referred to as an "atomic team," is formed to explore potential opportunities. This team typically includes a product manager, engineers, and possibly a designer or data scientist, depending on the product's needs. (6m42s)
• Founders must provide these teams with sufficient resources and protection to prevent them from being overwhelmed by the rest of the company, which can hinder their progress. This includes shielding them from excessive internal communication that can act as a denial-of-service (DoS) attack. (7m20s)
• The goal is to help these teams reach their first design partner, meaning they need one or two customers willing to experiment with the new product. This approach is part of a broader strategy for new product development. (7m56s)
• Milestone-based financing is used, where additional resources are allocated if sufficient product-market fit is found. Overprocessing, such as running an internal venture capital model, can be counterproductive as it may lead to process manipulation rather than genuine insight discovery. (8m7s)
• Teams are encouraged to explore freely, and they often return with either a clear indication that a project will not work or evidence of a viable opportunity. This approach allows for quick adjustments and resource allocation based on real-time feedback. (8m37s)

What Is a Grinder Problem? (9m3s)

• A "grinder problem" is described as a type of challenge that requires persistent effort and hard work rather than just intellectual strategy. (9m13s)
• The early history of Plaid involved integrating with numerous banks, which required building screen scrapers due to the lack of APIs, making it a complex and labor-intensive task. (9m19s)
• The belief was that by persistently working through these integrations, Plaid could develop superior technology and create a unique product that others would not attempt due to the difficulty involved. (9m40s)
• Despite the challenges and doubts from within the company about the feasibility and difficulty of the task, there was a strong belief that grinding through the problem would lead to a product that no one else could or would build. (10m9s)
• The focus on grinder problems emphasizes the importance of the willingness to do the hard work necessary to achieve a unique outcome, rather than relying solely on strategic brilliance. (10m27s)

Is There Defensibility on Day One? (10m37s)

• A discussion highlights that startups typically lack defensibility on day one, even if they have some initial advantages like industry knowledge. The focus should be on long-term differentiation through factors like network effects, brand, or scale. (10m37s)
• The importance of experience is emphasized, with a caution against overvaluing immediate defensibility at the start of a project and undervaluing it in later stages. (11m31s)
• The concept of a "grinder problem" is introduced, where repeated work and scale are crucial. However, in some markets, like those with fewer banks, the opportunity for such problems is limited. (12m18s)
• Recruiting is discussed as a critical aspect of building a successful company. It is described as a competitive, win-loss game where the goal is to find and convince the best people to join the company. (12m58s)
• Discoverability in recruiting is likened to a search for truth, where the challenge lies in identifying true greatness and ensuring the right fit for the company. (13m52s)

Biggest Lessons on How To Do Outreach (14m17s)

• Early in a career, sending cold emails to people expressing admiration for their work and asking for a short conversation can be an effective outreach strategy. Many people are surprisingly willing to engage in such conversations. This approach is also applicable to recruiting efforts. (14m17s)
• When reaching out for recruitment, it is important to keep emails short and succinct, ideally under five sentences, to increase the likelihood of them being read. (15m21s)
• In terms of talent assessment, the philosophy of hiring for "spikes" is emphasized. This means looking for individuals who excel in certain areas, even if they have weaknesses in others, as a team can balance these out. (16m1s)
• There is a preference for hiring individuals with unique experiences and different ways of thinking, as this diversity can contribute positively to the team. (16m39s)
• The initial bias against hiring highly experienced individuals, based on the assumption that they might lack hustle, has evolved. Experience is now valued, especially in specialized fields, provided the candidates also demonstrate the right mindset and values. (16m45s)
• A balance is sought in the team composition, particularly in financial services, with a target of 70% of team members coming from outside the industry and 30% from within it. (17m50s)

Hiring Mistakes (17m57s)

• Hiring mistakes often occur when there is pressure to fill a position quickly, leading to decisions that may not be ideal in the long term. (17m58s)
• In early-stage companies, there can be a tendency to hire someone just to get a necessary job done, even if the candidate is not the perfect fit. (18m11s)
• This approach can result in having to address and rectify the hiring decision later, but it is sometimes considered acceptable to meet immediate needs. (18m24s)

Founder Mode (18m32s)

• The blog post titled "Founder Mode" by Paul Graham went viral quickly, sparking widespread discussions among founders and within companies. (18m33s)
• There is concern that the blog post might be misused, leading to negative behaviors in startups. It could be misinterpreted to undervalue great executives or encourage founders to micromanage everything. (18m58s)
• Effective delegation is emphasized as crucial; founders should stay close to important tasks while allowing more distance from less critical ones. Over-delegation is identified as a common mistake. (19m46s)
• The blog post might be used to justify poor behavior, as not all CEOs can emulate the success of leaders like Ryan Peterson or Zach Perret. (20m10s)
• Practices like Steve Jobs' top 100 offsite meetings are not universally applicable and were specific to Apple's context at the time. (20m28s)
• While leaders like Brian Chesky offer valuable lessons, not everyone can replicate their leadership style or success. (20m57s)

Popular Silicon Valley Beliefs That Zach Disagrees With (21m5s)

• Fred Wilson's blog post on reserve utilization highlights its importance in early-stage portfolios, emphasizing that while it can drive DPI and returns effectively, it requires being a brilliant picker, which most people are not. (21m5s)
• Many common beliefs in Silicon Valley are narrowly applicable, and founders should make their own decisions on important matters, being willing to revisit and remake those decisions as needed. (21m42s)
• For 80% of company operations, existing models can be copied, but 20% require unique approaches, with significant effort focused on these unique aspects. (22m3s)
• Contrary to popular advice, hiring a VP of sales early is not always necessary; founder-driven sales can be more beneficial for learning about customers and building a great product. (22m11s)
• OKRs, originally designed for manufacturing, may not be suitable for software companies, and businesses should adapt goal-setting methods that fit their specific needs rather than blindly following models like those used by Intel. (22m55s)

Is Speed the Key to Going from 0 to 1? (23m17s)

• The most crucial factor for companies transitioning from zero to one is being strategically correct about the problem they are solving and then executing with extreme speed. (23m17s)
• It is important to apply the principle of moving fast, especially after achieving product-market fit. Before reaching this stage, it is essential to gather data and understand the right direction before accelerating. (23m29s)
• Velocity, defined as speed in a given direction, is emphasized as important, but it is crucial that the direction is correct. (24m0s)
• There is a concern that many founders follow a predictable path of achieving certain revenue milestones to raise successive funding rounds, which can feel overly manufactured and detached from the core purpose of building products for customers. (24m12s)
• Great entrepreneurs are encouraged to apply their unique perspectives, and there is a belief that raising money frequently can be a waste of time. Instead, it is suggested to raise funds infrequently, focusing on business growth and customer satisfaction. (24m37s)

How Zach Balances Big Rounds with Dilution & Valuation? (25m2s)

• When considering raising funds, it is important to evaluate the need for resources and to acquire them efficiently. Initially, the company did not require additional funds as it was profitable, but later, raising money became necessary. (25m19s)
• The concept of "always be raising" is questioned, as it could lead to wasted time. (25m42s)
• The hardest funding round was the seed round, which was challenging due to a failed initial consumer app and a pivot to a more successful infrastructure product. (25m49s)
• During the seed round, a $500,000 funding deal at a $2 million valuation fell apart when the lead investor backed out, leaving the company nearly out of money. (26m49s)
• Despite the setback, three investors named Justin collectively invested $60,000, providing a crucial lifeline for the company to continue operations. (27m13s)
• The company later secured a contract with Venmo and, six to eight months later, successfully raised a seed round at an $11 or $12 million valuation, marking a significant improvement. (27m34s)
• During the difficult period, the founders faced personal financial struggles, including not paying themselves for six months, living on friends' couches, and accruing credit card debt. (27m47s)

Making Money or Taking Secondaries Changed the Mindset? (28m12s)

• The discussion revolves around the impact of secondaries and money on a company's progress, highlighting the importance of allowing employees to participate in secondary sales. (28m12s)
• During a funding round following a failed sale to Visa, efforts were made to maximize employee participation in the secondary market, which was significant for both the team and the company. (28m31s)
• Initially, the company was set to be sold for $5 billion, but the deal did not go through, leading to a change in plans and a focus on long-term benefits for the company. (28m56s)
• Employees had mentally prepared for the financial outcome of the sale, and the shift in plans led to some disappointment, although it was understood as a rational response. (29m13s)
• In a subsequent funding round with a higher valuation, employees were allowed to sell a portion of their shares, providing some liquidity, though not the full amount they might have expected. (30m11s)
• The experience was challenging for employees due to the change in expectations, but it was ultimately seen as beneficial for the company's future growth and the employees' involvement in it. (30m35s)
• There is a continued focus on enabling employee participation in future secondaries, emphasizing the importance of team involvement. (30m47s)

On Raising $13.4BN Valuation (30m52s)

• The valuation of $13.4 billion for the company was achieved in a specific market environment, and the true value of a private company is determined by what someone is willing to pay for its shares. (30m52s)
• The speaker expresses a desire for a real-time market valuation to simplify tasks like employee compensation and acquisitions. (31m4s)
• Since the valuation was raised, the valuation of tech companies, in general, has decreased, and the speaker acknowledges the responsibility to raise funds with minimal dilution. (31m21s)
• There is a strong sense of responsibility towards investors, with high expectations for the company to ensure investors make a significant return on their investment. (31m41s)
• The fundamentals of the business have improved since the investment, but market multiples have changed, requiring patience and effort to achieve returns. (31m58s)
• The structure set up with Visa allowed the company to operate independently with substantial funding, which was beneficial, although the speaker prefers an independent path. (32m31s)

Is M&A Completely Shut Down? What Could Lead to Its Revival? (32m51s)

• The current state of mergers and acquisitions (M&A) is described as being completely shut down, with a lack of liquidity affecting investors and limited partners (LPs) who are experiencing significant liquidity constraints. (32m54s)
• Large M&A transactions are facing intense scrutiny and are often blocked by regulators, although this political environment is expected to change over time. (33m22s)
• There have been some notable acquisitions, such as large AI acquisitions and acqui-hires, but these are not feasible for companies with numerous contracts that need to be transferred to the acquiring company. (33m32s)
• The difficulty in executing large M&A deals is highlighted, and there is uncertainty about when the situation might improve. (33m46s)

IPO Markets Today (33m49s)

• The viability and value of an IPO can vary significantly for founders, and it is important for late-stage founders to stay alert to the state of IPO markets. (33m51s)
• An IPO is considered a meaningful milestone and a fundraising event that should be pursued when the company needs capital and when being public is beneficial. However, the current market conditions are not seen as attractive for going public. (34m11s)
• There is a belief that companies can grow into great entities in public markets, and the increased rigor of being a public company is seen as beneficial by many public CEOs. (34m42s)
• Despite the benefits, the decision to go public is not immediate, and it is anticipated to happen in the next few years. (35m10s)
• A philosophical approach to decision-making is employed, where a hypothesis-driven model is used to have a starting point for decisions, even if the confidence in those decisions is not always strong. (35m27s)
• There is a concern about the weight of words and the impact of speaking with confidence, as it can lead teams to follow decisions without questioning the level of confidence or care behind them. (36m26s)

The Biggest Flaw as a CEO (36m41s)

• One of the biggest flaws as a CEO is the difficulty in recognizing and celebrating progress if the outcome is not excellent. For example, improving from a two out of ten to a four out of ten is significant progress, but there is a tendency to focus on the fact that it is still not perfect. This lack of recognition can discourage team members. (36m41s)
• It is important to celebrate interim milestones and progress, even if the final goal has not been reached. This helps motivate the team and supports them through the process of improvement from terrible to good to great. (37m39s)
• In the early stages of a company, it is crucial to manufacture small wins to keep the team motivated during stagnant times. Setting big goals and identifying the first milestones to celebrate can help demonstrate progress and maintain momentum. (38m12s)
• A personal trait that contributes to success but also poses challenges is being very independent and self-sufficient. This can make it difficult for others to get to know or empathize with the individual, but it also allows for clarity in decision-making and big thinking. (39m34s)
• Enjoying solitude and self-reflection, such as sitting on an airplane with headphones on, provides clarity and allows for deep thinking and decision-making. This self-sufficiency and isolation are seen as beneficial for personal clarity. (40m11s)

How Fatherhood Impacted Zach (40m42s)

• Becoming a father is described as a significant and transformative experience, impacting both personal and leadership aspects of life. It enhances one's capacity to love and recognize others, and it brings about changes in time management, prioritization, and coaching skills. (40m43s)
• The most profound personal change observed was an increased capacity to love and a deeper recognition of others, particularly through witnessing a partner's transformation into a parent. This experience led to a broader understanding and acceptance of the evolving aspects of people in one's life. (41m5s)
• Success is viewed not just in terms of achieving more or faster, but in striving for excellence in whatever is undertaken. The focus is on the quality of work, such as producing great shows, rather than the quantity. (41m41s)
• The drive for excellence is largely influenced by external competition, which can be both motivating and challenging. However, there is a shift towards self-competition, where the focus is on being as good as possible, rather than being overly concerned with competitors' actions. (42m20s)

Is Investing While Running Plaid a Distraction? (42m47s)

• While running Plaid, there was a concern about whether investing could be a distraction from core responsibilities and commitments to Plaid's investors. (43m7s)
• As Plaid grew, there was a shift towards later-stage engagements, which led to a perceived loss of the founder mentality and attention to early-stage markets. (43m39s)
• To reconnect with early-stage companies, angel investing was initiated in 2016, which helped maintain freshness, build a network, and learn new things that could be applied to Plaid's product development. (43m49s)
• Angel investing was found to be personally demanding and time-consuming, leading to a partnership with a friend to start a fund, allowing for more structured and leveraged involvement. (44m32s)
• The creation of the Mischief fund involved three full-time entrepreneurs, with limited time commitment from the original founder, allowing for continued engagement with entrepreneurs and sharing of insights. (44m59s)
• The experience of investing and interacting with other founders contributed to personal growth and the ability to teach and share knowledge within Plaid, fostering a pay-it-forward mentality. (45m50s)
• There is a recognition that venture capital has transitioned from a boutique industry to a commoditized asset class, with implications for returns and the value added by venture capitalists. (46m12s)

How Has VC Funding Moved the Needle for Plaid? (46m41s)

• A venture capital firm played a transformational role for Plaid by stepping in during a funding round that was at risk of falling apart for unrelated reasons. (46m41s)
• The venture capital firm not only decided to support Plaid but also offered more money at a higher valuation, significantly impacting the company's trajectory. (46m57s)
• The decision to invest at a critical time demonstrated the firm's deep belief in Plaid, which was highly appreciated by the company. (47m5s)

Quick-Fire Round (47m39s)

• A recommended book written before 1965 is "The Wealth of Nations." (47m44s)
• Contrarian advice for founders includes not following most of the advice given by venture capitalists (VCs) without question. (47m52s)
• A dangerous trope from VCs is implementing OKRs too early and setting revenue metrics before achieving product-market fit. Founders are advised to stay involved and understand the details rather than hiring executives and giving them too much space. (48m0s)
• A significant change in perspective over the last 12 months is the importance of hiring for experience in areas where deep industry expertise is crucial. (48m25s)
• The internet is considered an underrated technological advancement, with innovations like seamless online shopping experiences being particularly impactful. (48m43s)
• In five years, success for Plaid would mean enabling easy access to credit based on personal data and reducing financial fraud. A failure would be not achieving these goals. (49m25s)