Okay, so this is how to evaluate startup
ideas, and this is actually a new
set of content that we've developed based on a lot of feedback that we saw
from the last startup school, and what we noticed is a lot of people's challenges.
So last year's curriculum actually had a lot of content that ended up being, when
we looked at the data for who's participating in startup school, was like, "Oh, this
is much more advanced, it's much further along." A lot of people, for instance, like,
"I had no idea." Or like, "I have too many ideas." That they don't know
which one to pursue. Because a main reason why a lot of people are only
able to work on their startup sometimes part-time, yes, they might be stuck without resources,
but they didn't have conviction. They didn't know like, "Oh, what would I have to
believe in order to say, 'I want to quit my job'?" This is also a
really great sort of skill to sort of have, because if you are realizing you
need to pivot, how do you evaluate if you need to do that? And then
also if you're pivoting to something else, how do you evaluate whether something is worth
going to? And if you already have a launch company, then you might have problems
with like, "Why isn't this growing?" Or, "How do I improve it?" And evaluating your
start up, especially in the way that sort
of investors evaluate startups ideas, we find
it's going to be really, really useful. This is like myth about Y Combinator is
that people think YC only funds companies who have tons and tons of traction. That
nowadays the only way to get into YC is you have to have lots of
revenue, or tons of users already. And part of that has to do with the
press and then the exposure of the companies that make it to demo day; those
are the stories you tend to hear. But that being said, there's lots of great
examples of companies who actually got accepted just with an idea. And so, Zenefits is
a really good classic one, Parker was a
single, non-technical founder who pitched an idea
to YC and he got in that way; we also had Reddit. So, technically, they
were forced to pivot right away, so they hadn't written a single line of code.
And then my experience in YC is actually exactly the same. So when I founded
Wufoo, and we entered that second batch, we also had not written a single line
of code; PG had invested us at just the idea stage. And so I feel
fully committed now, as a partner, to always be trying to find and dedicate time
and energy to funding companies who are just at the idea stage. A lot of
our efforts here for working on startup school,
is to help you work on how
to talk and think about your startup. And that if we can fix that, it
can help you sort of inspire us to be like, "Oh yeah, I can believe
in what you're doing." And a lot of times, founders get in the way when
they're telling their narrative. So how can I
predict if an investor will like my
idea? That's, ultimately, what I'm trying to figure out. And the answer is really easy.
And so for us at YC, the definition of a startup is a company that
is designed or created to try to grow
very quickly. So if you're not trying
to build a company that grows very, very fast, then you're just building a normal
company; it's a small business. And there's nothing
wrong with that, but these companies are
the ones that investors are interested in. So if you're hoping to build something that
will have tons of users, that will have huge valuations, that'll be able to attract
venture funding, then the evidence that we want is evidence that shows that your company
can grow quickly. I have a confession to
make, if you ever meet me, or
talk to me about your startup, and kind of recruiting, or at one of these
events, I will never tell you that I
do not like your idea. And there's
a reason for that, it's not to be nice to you, it's not to blow
smoke up your ass. I learned this way of thinking from Paul Graham, he says
like, look, "The average investor, or a lot of the investors that you see, when
you talk to them about your idea, it feels like they're trying to poke holes
in your idea. They're trying to figure out what's wrong with it, and then they're
trying to show, sometimes, just how smart they are." And he explained that his job,
and the way he sees our work at YC, is that it's not to figure
out what's wrong with company, but to figure
out how it could possibly win. Because
our bets, the ones that win, are the ones that are non-obvious. And so for
us to figure out the non-obvious stuff, it's going to not sound obvious when they
first tell you. And so we have to work on our imagination, we have to
work on our optimism to figure out, "Oh what is the way that whatever story
that they're telling me could become a billion dollar company?" And then a great investor
pitches that back to the founder. I figure out all the ways that I think
whatever you're doing could possibly become big, and then I'm trying to convince you that
this is what needs to happen so that I would have the evidence, or that
you will be on the right path to having a company that grows quickly. A
startup idea is, basically, a hypothesis and this is the way you should think about
it. It's a hypothesis about why a company
could grow quickly. And your job is
to figure out how to construct your hypothesis, basically the pitch, to the investor so
they understand how it can go grow quickly. A lot of times, people make the
mistakes of trying to just accurately describe or over describe a lot of different parts.
So I'm going to break this down. So just like a normal hypothesis has a
pretty decent structure for this, this will, hopefully, help you sort of workshop like understanding,
"Oh this is exactly all the reasons why this should succeed." And so even before
we start even building anything, we can have an understanding of like, "Oh, here's the
potential path of this company." Or, "Here's the things I need to prove that show
that this comedy could do well." So the first is the problem, so the startup
idea's composed of three parts, the first part is a problem; and it's basically the
initial conditions. You have to explain to me, "What is the setting for this company
that allows it to be able to grow quickly?" The second is the solution. So
this is, basically, what is the experiment that you're basically running, within those conditions, for
it to grow really quickly? And the third is what's your insight? So what's your
explanation why the thing that you're going to try, your experiment, is going to end
up being successful? Those are the three components that I'm always trying to figure out
when I'm listening to someone's pitch. Here's a tip for talking about the problem, or
to know whether your problem, your initial conditions,
are correct. The first is good problems,
they're popular; so a lot of people have the problem. You want to avoid problems
that there's a small number of people that have it. We like problems that are
growing so, therefore, the market basically, is it growing at a rate that more and
more people are going to be having the problem? And it's growing faster than other
people's, or other types of problems? We like problems that are urgent, ones that need
to be solved very, very quickly. We like problems that are really expensive to solve,
because if you're able to sort of solve it, then you can charge a lot
of money, potentially. We like problems that are
mandatory so, therefore, it's like, "Ah, people
have this problem, and they have to solve it." And then we like problems that
are frequent, ones that people are going to encounter over, and over, and over again;
and often in a frequent time interval. So
what you want to have is some
aspect of the problem that you're working on, at least one of them, and it's
ideal if you have multiple of them. You don't have to have all of them,
but it's one of those things where it's like if your company isn't growing, or
if someone's not as excited about the problem, it's probably missing some of these characteristics.
The last one about frequency is super important
because I like problems, and you'll find
a lot of YC partners like problems, a lot, that gives people a lot of
opportunities to convert. Part of that has to do with some theory, so B. J.
Fogg, he's a researcher at Stanford, and he tosses this formula up all the time.
And he says basically, "If you're trying to change someone's behavior, you have three things
you need to have in place. You need to have the motivation, the ability, and
the trigger; they need to all happen at the same time." So the motivation is
like, "I have this problem, I need to solve whatever it is." The ability is
your startup, and the last is the trigger. What's going to be the thing that
gets them to all of a sudden realize, "Oh, I need to solve it with
your thing?" And so a lot of companies will have like, "Oh I built something
but, for some reason, no one's signing up." Or like, "They're not using it, they're
not engaged, I have no retention." And a lot of the times is because it's
you're hoping that they will somehow just remember, on their own, that they have the
problem, and to start using you. And, oftentimes, most companies don't send enough, for example,
email notifications, or triggers, or reminders, or figure out ways to come back into the
app, or figure out ways to be back in front of the user at the
right time. And if you can't figure out those opportunities, it's really hard to get
people to switch over to using your solution,
service, or product. So our ideal problems
are millions of users, millions of people have it. That's why people like to work
on consumer companies, that's why some investors like to focus on them. We like markets
that are growing 20% a year; the problem is growing quickly. We like problems where
people were trying to solve it right now,
immediately. We like problems that just cost
a ton of money; so billions of dollars. Or at least they all add up
to some billion dollar total addressable market. We
like problems where the law has changed,
and regulation is put up there, and now people have to solve a bunch of
problems. You saw a ton of healthcare startups
were born after Affordable Care Act was
passed. And a lot of that had to do with there was now, all of
a sudden, opportunity; this problem that all these
hospitals and clinics had to solve. And
then we like problems that people need to solve multiple times a day, or will
use it multiple times a day. [inaudible 00:10:35]'s a good classic example, but people also
really love Slack, because it's like, "Oh, I'm going to be engaged in using it
multiple times a day during the workday." Solution.
So there's pretty much only one piece
of advice I really have for the solution that's the best advice that you could
ever follow, and that is don't start here. So what I mean by that is,
at YC we have an acronym for a problem that we try to avoid or,
basically, an application that we have to go like, "Oh man, I wish they had
started with the problem first." And we call it 'SISP', and it means Solution In
Search of a Problem. And often what happens is you're an engineer, you're excited about
technology, some new technology has come on the
scene. Let's say it's Blockchain, let's say
it's like React Native, or whatever the new thing is and you're like, "I want
to build something with this." It's a large reason why you start working on a
startup project. And then you go like, "Okay, what kind of problem can I solve
now? I want to use this no matter what." And then you try to shoehorn
a problem into the solution. And what ends up happening is that's a much more
difficult way to grow the company. It's not impossible for companies to grow this way,
it's super inefficient. It's much better to be like, "Let me see what problems people
have, and I will use whatever is necessary
to solve them." And, therefore, it's much
more likely that you will grow as a result. Because the other way around, is
you might have to go and try to drum up the problem, or you have
to brand a problem as something that people have, and it's so much more difficult,
and you end up growing much more slowly as a result. So look at what
you're building right now, or look at the reason why you're trying to do this
startup, and is it because you only care about the technology and building something in
that? Or have you started with a problem, you go like, "I'm going to do
whatever it takes to solve people, user's, customer's
issues." The last one's a little tricky.
It's what is the insight? What's the reason why this solution is going to work?
And this is where a lot of companies sort of get tripped up. Because it's
really about like what is your company's unfair advantage? Why are you going to win
versus everyone else? Why are you going to be the fastest one to sort of
grow? Because that insight is what's needed for the investor to choose you over anyone
else, and it has to be related to growth. You have to have an unfair
advantage that explains why you're going to grow quickly. If it's not related to that,
then it's not going to be something that an investor is going to find valuable.
And the last one is, you need one. You can't just be like, "I have
a problem, I'm solving it." And then have no explanation why. Without that last sort
of explanation, I can't use my imagination, I can't evaluate just solely on how well
you've thought through this problem. And so let's
go through the types of unfair advantages
that your company have. So there's five different types and companies do not have all
of them. Really great ones, not surprising, will have all of them and we'll go
through two examples. But you want at least one, and it's nice if you can
have two or three; but for most of you, it's probably just one. So the
first one, so how do you know if you have a founder unfair advantage? And
so, all of these will be connected to numbers actually, which will help this make
this really easy. Is like are you one in 10 of all the people in
the world who can solve this problem; are
you a super expert? And 99% of
the people we fund at YC, do not fall into that category. And so if
you think it's like, "Well, I'm a product manager at Google." There's a lot of
product managers at Google. If you say you're an engineer at Microsoft, there's a lot
of engineers at Microsoft. It's like great, but it's not one that will make me
think, "Oh, you have a greater unfair advantage than someone else." If you've done a
PhD and, let's say, you've done it on some kind of crazy biotech research, and
you have a special patent to be able to cure some kind of disease; then
you have a founder advantage. Your market. Is
it growing 20% a year? By default,
if you just build the solution in the space, you should just automatically grow, because
you're just following a trend. If this is
your only company advantage, then it's one
of the weakest ones that you could have. It is great to be in that
space, but you want to have something in addition to this. You're going to do
better than average because you've picked the right problem space, and the right set of
customers that want your problem. But again, if you're in a market that is stagnating
or shrinking, then you're going to have investors worried about the longterm viability of your
company as a result. Product. So this is
super simple. Is your product 10x better
than the competition? If it is, then you, potentially, have an unfair advantage; and it
has to be very, very clear. Someone should be able to look at your product
and go like, "Oh shit, this is so much better than everything else I've ever
seen. It is 10x faster, it is 10x cheaper, etc." And if it's not an
order of magnitude, let's say, it's just like
2x or 3x, again, that's nice, but
it's not enough for an investor to go like, "Oh, this is a slam dunk."
In regards to that 10x product and showing that you are able to have that
... Later in startup school, I'm going to do a lecture on pricing. And we'll
talk things about cost and value, and that'll help you sort of better understand is
like, "Oh, how to better prove out that 10x multiple using sort of metrics and
numbers and pricing." Acquisition. So, a lot of
people think that if you go to
investor and you've done a bunch of Facebook, or Twitter, or Google ads and you
show your CAC and LTV, that you will able to prove that you have a
sustainable sort of acquisition model. And I want you to know that if paid acquisition
is the only way that you are able to grow your company, then I'm going
to discount that channel of growth greatly. That is because if you actually get really
popular, you've actually start being someone significant, let's
say, becoming a $100 million revenue company,
then you're going to attract a lot of competitors in this space, and that advantage
is going to quickly dwindle over time. Blue [inaudible] is a really good example of
this. Almost all their acquisitions in paid, and then once they ate through that, there's
almost nowhere else for them to sort of go. You want to find acquisition paths
that costs no money. And my favorite companies, the ones that become really great, are
the ones that can grow by word of mouth; this is a good percentage of
the way they grow. And so in the early days of a startup, if you
don't have any money, that's actually very great way of exercising, "How do I grow
this without having to pay for it?" And so in the beginning, we tell you
to do things that don't scale, but this is what you sort of want to
accomplish. It's like, "Do I have an advantage that is free?" And the last one
is, do you have a monopoly? And so
we don't mean this in the monocle
Monopoly game sense, so we mean it as as your company grows, is it more
difficult for you to be defeated by competitors,
do you get stronger? And so good
examples of that are like companies with network
effects and marketplaces. Where marketplaces where it
tends to be a 'winner takes all', one company will tend to win. And network
effects is just, basically, as my network grows, the strength of my company, and the
value of the product or service also grows with it. Not every company has it,
well when when you do have that, works out great. There's something to keep in
mind, also, as other things I'm looking to believe about a company, and that is
something that trips up a lot of founders. And so there's two types of beliefs
that I have about a company. And so there's the threshold belief, which is like,
"What's the default just for them to even
succeed?" So oftentimes, for me, it's like,
"Oh, them building it, can they even build it?" That's a threshold belief. If they
can't even build it, none of it even matters. And so, to me, that question
is not the most important. What will determine whether ... "I'm going to win the
lotto." Is a miracle belief. That like, "Oh my God, if I believe that they
can do this, that actually going to be able to take off really well." And
sometimes they're really simple, so if you are heavy engineering team, or doing a B2B,
or enterprise startup, again the default is you have to build it. So if you
can't even build it, then it's not even going to work, so I don't spend
actually a lot of time looking at that. For me, I'm trying to figure out
success will be determined by how well you can do sales, how well you can
tell the story, how well you can actually convince customers, and work through a sales
process. I want evidence that shows that you know have to work through that and
make that happen. And so, all of my work with most of those companies is
like not working on product, it's like, "Hey, all right, let's prove this other thing."
That if you have that, that'll be the thing that actually will help people go
like, "Oh shit, they have this super combo."
Let's go some quick examples. So YC
is a good one, because we like to think of YC as a startup. So
the problem. The way we'd word this is it's hard for founders to raise money
without knowing someone in venture capital. So at the time that it was started, you
basically had to be an insider, and that was the only way you can sort
of get money; and that super sucked. And
the solution that, basically, Paul Graham came
up with is like, "Invest in companies through an open application, you don't need to
know anyone. You just tell us your idea, tell us a bit about yourselves, and
that should be enough for you to get
funding." Now there's a bunch of unfair
advantages that YC had. Number one, the founders
are pretty incredible. So Paul Graham had
wrote a textbook on Lisp RTM, wrote the
very first worm; he's like amazing programmer.
And they had built and sold the first SAS company that was via web to
Yahoo. So they were kind of experts at
both evaluating technology, and also understanding kind
of startups in that whole process. The market.
Basically believe that future billion dollar companies
will be technology companies; they'd be powered by
software. And the wonderful thing about tech
companies, especially at that time, was Moore's Law was making it cheaper and cheaper for
software companies to be started and, therefore, they needed a whole lot less money, and
he could make a lot more bets as
a result. The product. So basically, they
pay the founders, they come for three months, they get some advice, they work on
their product for a relatively small amount of money. And then at the end of
the time, instead of offering co-working space, they work from their own home, and then
they pitch to a bunch of different investors. And the idea was that would be
so valuable to a potential founder who had no connections, that it would attract a
lot of really great minds, or a lot of people who were hungry to get
into the space. Acquisition. So most of you
don't realize this, is PG was able
to sort of build up YC and attract the right talent because he had a
huge reach, or audience, when he got started. He had written that textbook, yes, but
he also wrote all these popular online essays, and he had a large audience of
his target users, hackers to come and evaluate his product. And he could acquire them
relatively cheaply just by making a website and letting it be known. And then the
last one is, something he didn't even realize when he started YC, and that is
that as the YC alumni network grew, it got more powerful and more valuable over
time. The results are funded thousands of companies,
there's 4,000 founders, they're the CEOs of
some of the biggest companies in the world. They are over 15 companies worth over
$1 billion. There's 93 companies with over $100
million, and our total market capitalization is
over $100 billion. I'm going to do one more example with you guys. So Wufoo,
this was my startup, and it's an online form and survey builder. And so for
us, it was, basically, if your website needs to collect some kind of data, at
some point, but you need to know how to code or hire a programmer to
be able to do it. And so the solution was to build something that what
they see is what they got. Like, basically, a drag and drop visual editor, and
that any non-technical person sort of create. And then if we did that, we would
solve that sort of specific problem. So very
quickly, the market. It's kind of ridiculous,
we were asked in the early days calculate our TAM, but it was like, "Every
website needs a form, I don't really understand, what website doesn't need a form eventually?"
It allowed us to grow really, really quickly, our product was easily shown to be
10x faster against the direct competition with other builders, because it was so much faster
to do the drag and dropping and visually see. And then it'll usually 100x faster
than a lot of traditional routes for very custom forms, for hiring a programmer very
cheaper, because we had this freemium model. That
also led to an acquisition unfair advantage.
And so we actually had started off with building a blog and building an audience
as well. Started off with 100,000 developers subscribed to our blog, we launched it out
to them after building up that audience for a year; and that's actually what we
applied to YC with. Is we had built up this audience, we had proved that
all these other things are in place. And then, part of the other acquisition model
is that you could embed these forms on people's websites, and then our users basically
spread our form and software for us as a result; so we never had to
hire any sales people. And the results are, our product was used by every industry,
market and vertical you can imagine. Tons of super large companies, and we did this
with a relatively small amount of team. When we were acquired, we were a weird
outlier compared to all the other acquisitions. The
average company raises like $25 million before
an exit, and this is their average return. And for Wufoo, we only raised $118,000
for the whole life of the company, and
our returns are over 30,000%. Okay, so
in the end, this is very simple exercise, but super enlightening once you actually go
through it, and to try to figure out that narrative and story. So I turn
it back to you, go through and try to answer those questions about problems, solution,
your unfair advantage. Figure out, "Where are my holes, do I have one?" And then
the question becomes, "Oh, what do I need to prove, what do I need to
work on to make that happen?" Your startup idea is a hypothesis about why you're
going to grow quickly. For our next lecture, we're going to talk about the first
ways we try to prove it out to, basically, test our hunches, and that is
by talking to users.