Prerequisites for Starting a Company – Phil Libin
Craig Cannon [00:00] – Hey this is Craig Cannon and you’re listening to Y Combinator’s podcast. Today’s episode with Phil Libin and it’s from our 2013 Startup School. At the time Phil, was the CEO of Evernote so he shared some advice about running Evernote, but more importantly advice from starting startups in the past. If you want to check out this video or all the other videos from past Startup Schools, they’re all on our YouTube channel and we’ll be posting the transcript at blog.ycombinator.com. Alright, here we go.
Phil Libin [00:28] – I’m super psyched to talk to you. Paul asked me to come in and talk a little bit about what we went through in Evernote, especially, in the early years and the mistakes we made and the lessons we learned. And I’m happy to do that.
Evernote didn’t come out of nothing it was our third startup, and we learned a lot all the way through the process. The first real startup that I was involved with, I started with a few college roommates of mine, my best friends in Boston. We called it Engine 5. And that was kind of the first and probably the most important lesson to me right there was that I had great co-founders.
The most important thing, and it was very much the same team of people who were with me at the first startup and then the second startup and then many of them are even at Evernote, and I think the most important thing to do at as young an age as possible is to just cultivate this group of really, really brilliant, high energy, willing to work for free best friends for life. It’s super important to do that, and you kind of have to pay attention. I got lucky, I got lucky that the people I happened to meet in college, in the computer science department of Boston University, are people that have stuck with me, so far, the rest of our lives. I fully expect much longer.
In fact I would go so far as to say you shouldn’t even make friends with people you don’t see starting a company with. It kind of sounds dick-ish, I guess, but to be honest with you why bother. You only have so many best friends that you’re going to have, and if you can’t imagine counting on them in a pinch as a co-founder, use those resources wisely. I just lucked into it, I happened to get these great people, and I’ve been able to get really great people in every other company.
So basically we started our first company, Engine 5, a core group of those people went on to the second company, CoreStreet, a core group of those people went on to found Evernote. Evernote, I really hope is my life’s work. I don’t intend to really work in anything else, but if I ever do I already know that the 50 or so people at Evernote that are hopefully going to be with me whatever the next thing is. Developing this crew is super huge. I can kind of tell for most of you that you are kind of about that age, an area of life where you are making these connections, you are making these friendships and it’s going to go by really fast. Make the most of it.
Engine 5 was, we were consultants. We started this company that was originally going to be five of us, but two people chickened out, we already had the domain name. And it was just all three of us were computer programmers, we were all developers, and we literally didn’t know that there was such a thing as investors. It was a new concept to us. We didn’t know that there were people who would give you money so that you could build something. We just assumed that the way you build a business is you just start working, and you get paid, and you make more money than you spend and so on. And luckily, this was right at the lead up to the original dot com bubble in the very late 90s, and so if you could program people would just throw money at you. And we didn’t have much motivation in starting this company other than we just wanted to work together, and we want to see what it would be like to have a company, to be our own boss, to call the rules.
And so we did a lot of programming, consulting mostly around e-commerce stuff, and what we learned and this is probably the second most important lesson, being your own boss and having your own company and making the rules kind of sucks. If what you’re doing, ultimately, is being a consultant you are just getting paid by somebody else to write some code because you’re not really building any value, any long-term value. You could be getting paid, you can be making a decent amount of money while you’re working, but all of this idea that you’re actually calling the shots and you are in control is a complete illusion, what you’re really doing is working, building something for some other company. Though it’s amazingly hard work and the rewards are very immediate but they are not lasting. You don’t build anything up.
And so after working harder than we’ve ever worked for about two and half years, you know 16 hour days on average. I remember I would come into the office like at 2 a.m. and there would be people leaning out of the windows smoking because they didn’t have time to even go outside. Back then people used to smoke. Ask your parents. And we finally sold that company to a big company called Vignette in Austin, Texas about two and half years later, and we were super happy to sell it because we didn’t love this work. We were just working for somebody else. We were just building stores and e-commerce things and so we sold it. And it was pretty cool we didn’t know how to sell a company so we came down to Austin and it was totally … The acquirers did everything that you would expect. They totally slid the paper across the table with I’m going to write down a figure, and they slid it across the table. I’m totally serious, it was exactly like that. If any of you have seen the Always Sunny in Philadelphia episode, it was just that.
We sold that company, and a couple years later we left Vignette and we decided okay, what did we learn? Time to do something new, time to start a company because obviously we weren’t going to get real jobs at this point, but what lesson did we learn? And we said well, our lesson is we don’t want to be consultants, we don’t want to develop stuff for somebody else. We want to build a product, so we started our second company which was an MIT spinoff at the time called CoreStreet where we got together with this brilliant MIT cryptographer to build a cryptography and security stuff for banks and for governments, you know, products. And that was better in the sense that we were building a product, we were building something reusable, something we could add value to, but what we got wrong was it turned out that it wasn’t the product that any of us were madly in love with. Because it turns out nobody is madly in love with government security and cryptography stuff. People don’t wake up in the morning being like, “Oh yeah, I’m so excited the new government standard for contactless smart cars is out today.” Well, like one guy does that. That guy was me so it’s like doubly sad.
At some point, basically, we decided after seven years of this… and we had a good experience we set out to change the world a little bit, to redefine security and I think we did that in a small way, but what we started realizing was man, I’d sooner chew my own arm off then sit through one more Department of Defense procurement process hearing. And so we exited that company and we brought on adult leadership and we were able to sell that second company as well. And then got together in 2007 and said okay, now we are all in our mid-30s, we’ve had two companies and we’ve had some exits made a little bit of money what do we want to do now? What lesson did we learn? And we said okay, the first lesson we were right let’s not be consultants let’s build a product.
But the second lesson, it shouldn’t just be any product. It shouldn’t be a product about… We shouldn’t sit around thinking what does the market want, what does the market fit? How do we build something that we can sell? What will people buy? We got really tired of that. I got tired of board members and investors constantly telling me, which would happen all the time, they would constantly tell me, “Remember Phil, you’re not the target audience. Your customers are the target audience. Remember the best product doesn’t always win.” All of those things are true, and they’re especially true if you are building systems for banks and for governments, but they were just boring.
We said okay, the third time around let’s do this again but let’s only build something for us. Let’s build something that we love. Let’s build something that we love so that we are the target audience and let’s do it in a way that we’re not going to try to sell the company because we’ve sold two, and selling a company is a mixed feeling. I mean it’s nice, especially, the first time you do it if you have a decent exit and you make some money, but you put your entire life into this for years and then it’s not yours anymore. At best it’s a bittersweet feeling.
And we said the third time around let’s do it differently. Let’s have two guiding principles. Let’s only build things for us that we are in love with, that we want to use. And let’s build a company that we want to keep. Let’s explicitly say that there is no exit strategy. Let’s make something that is sufficiently epic to be our life’s work, and if you have something that’s your life’s work then you don’t need an exit strategy. There is no exit strategy for your life’s work. You should have a liquidity strategy, especially, if you’re going to raise money. You don’t need an exit strategy.
Let’s make something that’s sufficiently epic. Let’s make something that we can devote our lives to, that we can devote our lives to building, and let’s build it for us. And that was the motivation for Evernote, so we sat around thinking okay, what should we build? Well, let’s start with stuff that we like. You know, what do we like? And we said I play a lot of video games, I love video games. Maybe we should start a video game company. And we thought okay, but we already have really great experiences with video games. Even back then there was already a giant stack of games that I wanted to play that I couldn’t play through. I thought, the world isn’t going to be significantly better if we added another one because there are already people doing a great job keeping us entertained with video games.
So then we thought okay, what else do we like? And one of my co-founders said well, “I kind of like the new social network, the social media stuff.” And we said, “Yeah, that is kind of cool.” You know, Twitter was just kind of getting started, there were a few other things but we thought, you know what, there already so many companies doing it and it’s already a great experience. I mean, MySpace has already done everything you do with a social network… why would we want to start something to compete with MySpace already providing a great service, there could be nothing better and we decided not to do that. By the way, I suck as an angel investor. Just so you guys know.
But then we thought okay, well, we have pretty good experiences with entertainment, we have pretty good experiences with communication, with social networking, but when you are using productivity stuff, stuff to try to make us smarter, to try to actually accomplish something it’s for the most part just a really crappy experience. Anytime we use productivity software it feels either old or kind of cultish. It doesn’t actually get the job done. It doesn’t feel very elegant, and we thought okay, we are all nerds and we all want to build a second brain. We all want to be smarter. It isn’t a good experience right now, it really feels like things like smart phones and app stores are about to take off and get started let’s build something that’s going to be the modern definition of what it means to be effective and productive as a knowledge worker. We set out to do that.
We made a plan, we are going to call the company Ribbon, like you tie a ribbon around your finger to remember. And in my due diligence, in my research about it, we were in Boston we ran into this other group of people here, actually very close to here in Cupertino, sorry, in Sunnyvale that was called Evernote. That was started by this guy name Stephan Pachikov, and he had a team of people … Stephan is kind of this genius, mad scientist, entrepreneur, Russian-American guy. He had a team of people that actually worked, that went all the way back to the Apple Newton days. The Apple Newton was way ahead of its time first portable device with handwriting recognition and everything. And they were working on this idea of a second memory to everyone, you know building a second brain. We were seeing the same things so Stephan and I got together and we decided instead of competing let’s actually just merge the companies, let’s merge the teams and make something Evernote. So we merged the two teams in ’07, recreated the company, relaunched it. As a new company called Evernote, we recapitalized it which means, it’s a technical financial term which means it used to have a capital N Evernote and we made it a lowercase N. We also changed the investment structure, but that was less important to me. And we launch the new product 2008, and there was an important lesson there too, which is this is a mistake that I think we made.
It was a very unconventional start. This wasn’t the typical Silicon Valley startup start where you go to Y Combinator, and you have a couple of co-founders, and you get an A round, then you start something. We didn’t do that. It was a weird, complicated structure with kind of two teams coming together and one of them already had some investments then it’d all had to get redone, and this was a big mistake. I mean, it was great that we combined the teams, that we merged and the personalities were great and we were able to build something really fantastic, but we were way too clever structure. And I’ll never repeat that mistake.
It does not pay to be clever, to be innovative on the structure. On the legal entity and how you divvy up your stock or any of that stuff because it basically made us unfundable for a couple of years. Because until we were actually significant enough that it was actually worth a VC’s time, actually understanding why we were different and figuring out how to unwind it and how to fix it, until we were significant enough to get over that barrier no one would even take a look at us. And it took us… the fact that we were clever in the early days and tried to preserve this unconventional structure probably cost us 18 months of not being able to raise money. I definitely don’t advise that. I don’t advise doing anything particularly clever or different about how you do the basics and the dynamics. Just pay attention to what you hear and what people tell you and at YC and other resources and just do exactly that.
Be innovative about one thing only which is your idea. That’s the only thing you can afford as startup founders to really be innovative about is the main thing that you’re doing. Everything else you want to do is buy the book as possible at least in the early days to minimize your chances of failing for a stupid reason. And we almost did. Evernote almost failed for the stupid reason that we were too clever with our legal forms early on. So we cleaned up everything and we had self-funded it. I put some money in, Stephan put some money in, we had some friends and family investors and we were just about ready to raise a big round, took a long time but we finally got a $10 million term sheet. Not from a Silicon Valley investor, but a European investor.
The Silicon Valley guys still didn’t want to talk to us. And we had about three weeks of cash in the bank left. It was a very long due diligence because we had to fix all the structure stuff. But the deal was supposed to close finally, and it was supposed to close in 2008, in the fall, and the closing date was actually the day that the Lehman Brothers collapsed. And the investor called me on the day of closing and said, “Hey we just lost 60 percent of our fund value in one day. We’re not going to do the investment.” We had three weeks of cash left at that point. We hadn’t been able to talk to too many other investors for about the previous three months because we were kind of locked up in due diligence with exclusivity, so we panicked. We already had twenty people in the company, so we spent a week just frantically calling everyone. Calling everyone I knew, everyone I didn’t know just trying to get meetings, trying to get investments. Nothing, absolutely nothing. It was arguably the worst time to be doing it in the history of the universe.
It was late October 2008, I wasn’t particularly good at it. We had a spectacularly bad VC pitch. A VC pitch runs something like this, I’ll give you the quick version. I would say uh, uh, Hi, I’m Phil Libin, uh, you’ve never heard of me. We’re going to make this thing called Evernote. It’s going to let you, you know, write stuff down, remember things, using computers. We’re going to give it away for free, uh, please give me $10 million. It worked in Europe, it did. It worked in Europe. And then usually that would be enough to get us thrown out in Silicon Valley, but sometimes just out of kindness they would ask a follow-up question. And the most common question would be so who is your competition? And aw man, I would nail this one. This one would be great. I would say, our competition, well, pretty much every single computer or phone or PDA or any other device that’s ever come out in the last 50 years already has a pretty good free note taking solution on it. And that didn’t help us either. Anyway, I digress.
We were out of cash I spent a week trying to get cash, nothing. Now we have two weeks of cash left in the bank, it was 3 a.m., and I totally remember this day, I was sitting there at 3 a.m. And I decided finally that this is it. I’m going to shut down the company tomorrow morning. Going to go to sleep, going to force myself up from the desk, I’m going to go to sleep, I’m going to to force myself to sleep. I’m going to come into the office tomorrow, I’m going to lay everyone off, And shut down the company. Because we only had two weeks of cash left and we can’t really take it to zero we’ll get into legal trouble, so you have to make sure that you pay the last bills and all that kind of stuff. And I decided this was going to happen.
And I remember sitting there a when I finally decided to do this, and I kind of had this epiphany. I kind of thought oh, this is what it must feel like to be an adult. For the first time in my life I felt like I was an adult. This is what it feels like to be an adult, to make an adult decision. This sucks. Whatever happens afterwards I’m going to optimize my life for being as childish as possible from here on out. But I decided that this was going to happen, and about 3 a.m. right before I went to sleep I got an email, so I said all right, I will read one more email, and this email was from some random guy in Sweden. And he said, “Dear Phil, I’m a random guy in Sweden, and I’m just writing to let you know that I love Evernote. I’ve been using it for about two months.” Because it had only been out for about two months at that point. “And I love it. It has changed my life. It’s made me happier, it’s made me more organized, it’s really great.” and I remember thinking oh, that’s nice. That makes me feel better. You know how they say if you can make a difference for one random guy in Sweden, you’ve kind of achieved something? But then he went on to say in his email, “I’m just writing to see if you guys need any investment.” I wrote back and I wrote, why yes. We would like some investment.
And then I stayed up, I didn’t go to sleep and 20 minutes later I was in a Skype call with him. And of course we told him the whole situation and two weeks after that he wired us half a million dollars. And it was exactly enough, that half a million dollars was exactly enough. We cut back, I had stopped drawing a salary a while ago, and some of the management staff wasn’t drawing a salary. We had really tightened our belt, but that half a million was enough. It lasted about six months and then the worst of the crisis was over, but more importantly we had already cleaned up all of our structure. And the most important thing is we finally had traction. We finally had enough data where I could do a VC presentation that wasn’t awful, where I could actually say this is the model, these are the cohort charts, these are the unit economics, here’s how the business is actually working, here’s how we are making money today, here’s why it’s going to scale, and that six months made all the difference.
Then we were able to get financing, still not from Silicon Valley people. The first investors were actually Russians and Canadians and Japanese. One of our first professional investors was DoCoMo Capital, the giant telecom in Japan. The reason we got that was pretty good. They reached out on Twitter, they liked Evernote. By the way, every single investor in Evernote from the early days to the people that we are bringing in now, last year, every single investor is a fan of the product. We don’t even talk to people a who don’t love Evernote, but even early on when no one knew what it was the investors were all giant fans of the product. So we build it for us, but it turns out that we also build it for our investors, and for our employees and for the media and for every other constituency that was important for us. So DoCoMo came in.
We were still struggling at that point, we still didn’t have too much professional investment, but a couple of executives flew in from Japan and they had a meeting with myself and our CTO, Dave Enberg, one of my co-founders in our office in Sunnyvale. And they come into the room and we bow and to say hello. And in back of me I hear Dave say, “Thank you very much,” to them in Korean. and I hear this, and my thought is, wow, why is Dave speaking to these people in Korean? And I kind of look at him and he immediately realized what he had done because he was just in Korea, and his brain just got frazzled.
So he immediately realized what he had just done, that he just said thank you … He meant to say hello in Japanese and instead said thank you and Korean. He’s totally pale, he’s just he’s just ashen, like he is so embarrassed. And I look at the DoCoMo guys, and the DoCoMo guys are completely embarrassed. And the thing with Japanese people is they are so, for the most part, they have so much empathy they feel your embarrassment worse than you do. They are mortified about how bad we feel.
The only way out of the situation was for them to just give us several million dollars. Just to prove that there are no hard feelings. We got lucky in that as well.
But then things did get a lot better and then we did have traction and Morgenthaler came in as the first Silicon Valley firm, and then Sequoia went in big several times and it got a lot harder. It got a lot harder once we were a real company. I didn’t appreciate the time that actually the most fun I ever had, the most carefree that I ever was, the least stress I ever had was back when it looked like it might go out of business any day. It was back when the only priority was to raise money because things were really simple. Things were really simple, there was one fitness function as an engineer I just appreciated this, the only job was to raise money, to meet payroll, and to have enough cash. You know when you’re successful, and you call the bank and see that there’s a few more million dollars in there and you’re like, yes! And you were totally ready to fail at that point. You expect to fail. You are ready to do it, you’ve made peace with it. You know it’s going to happen. And in fact, it’s kind of liberating.
The day after, I think we raised our B round, the first time where we had a couple of years of cash in the bank, and we really felt we were out of immediate, existential danger. That day we celebrated, we had a big party, it felt great. And the next morning was when it got hard. The next morning was when I said now there’s an actual company, now there’s people depending on us, now there’s millions of users, now there’s expectations, now is when we actually have to do something. I can stand here and say, traditionally, it gets better. It does very much, but it also gets harder. It doesn’t necessarily get easier. And so you shouldn’t be in this be in this business, you shouldn’t be thinking about founding a company if what you are trying to optimize for is easy. It’s never gotten easier for me. It gets harder and harder all the time, but it also becomes more important and more and more rewarding. And in some sense more and more fun.
A reporter asked me the other day if I was still having fun day-to-day. And I had to be honest, and say you know what I’m not. It’s not fun day to day. It’s a huge amount of fun month to month, but it’s not fun day-to-day. When I look back at what did we achieve in the 30 days it’s awesome, it’s really fun, it’s really gratifying. But day in and day out when you are doing the job, difficult is kind of the main thing. Difficult, but since I still have this amazing team of people, this team of people who are much smarter than I am, who are much more capable than I am, many of which who have been with me now for 20 years, many have only been there for a couple of months. It’s vastly satisfying. And the only reason this works, the only reason that I can see myself doing this even though it’s super difficult and super stressful, I can see myself doing this for the rest of my life and it stays rewarding because we found something sufficiently epic to do.
We didn’t try to think about what piece of crap could we sell someone to make some money, flip the company. We thought about what can we do that we will continue to stay in love with? This is the main way that starting a business right now is different from starting a business even five years ago. If you were starting a business even five years ago it would have been stupid advice to say build it for yourself. If you are starting it now, it’s stupid advice to do anything else. Because if you build something for yourself, if you build something that you love, that is sufficiently epic, if you make something that you love there’s probably another billion people in the world that’d love it as well. Unless you are really weird.
Unless you are a spectacular weirdo, but even if you are, even if you are several standard deviations away from the center of the bell curve on weirdness, there’s probably still 10 million people who would love something just as weird as you. And because of the way that tech world has assembled itself, because of app stores and smart phone and social media the tech world is more of a meritocracy than it’s ever been. If you build something you love those 10 million or billion other people will also love it, they’ll know about it the next day, they’ll be able to find it, they’ll be able to use it, they’ll be able to pay you.
And if you are making it for yourself, if you’re making something great you are at a huge advantage over somebody who is making something for somebody else because you can at least tell when it’s great. You know. You are making it for yourself. You can be an honest critic and an honest judge of your own product. And if you’re not doing that it’s just much harder.
Make something sufficiently epic, make something that you will be able to be a fair judge of when it’s achieved greatness, or at least when it’s close to it. I don’t think we’ve achieved greatness at Evernote, but I think we get closer to it every day. And don’t bother making friends with people you can’t start a company with. Thank you.
Craig Cannon [28:21] – Alright, thanks for listening. So as always we’re posting the video and transcript at blog.ycombinator.com. Please remember to rate and subscribe to the school. Alright see you next week.