ABOUT THIS EPISODE

Today’s episode is a preview of the Startup School podcast

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This is the first lecture from Startup School 2019. It’s Kevin Hale on How to Evaluate Startup Ideas.

It’s also not too late to sign up for Startup School.

The course just started and the deadline to sign up is August 4th. Select companies who complete the course will also receive 15,000 dollars in equity-free funding.

Y Combinator invests a small amount of money ($150k) in a large number of startups (recently 200), twice a year.

Learn more about YC and apply for funding here: https://www.ycombinator.com/apply/

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Topics

00:00 - Intro

00:42 - Why we're starting with evaluating ideas

2:07 - YC doesn't just fund companies with traction

3:31 - How can I predict if an investor will like my idea?

5:57 - A startup idea is a hypothesis

7:37 - The problem

11:37 - The solution

13:07 - The insight

14:42 - Founder's unfair advantage

15:42 - Market growing 20% a year

16:22 - Product 10x better

17:12- Acquisition model

18:37 - Monopoly

19:32 - Threshold belief

19:52- Miracle belief

20:42 - Example: YC

24:02 - Example: Wufoo

English
United States

TRANSCRIPT

00:00:00Hey, how's it going? This is Craig Cannon. And you're listening to Y combinator's podcast. Today's episode is a preview of the startup School podcast. We're putting all the startup School lectures on their own podcast feed and looked it up in the description so you can subscribe.
00:00:15This is the first lecture from start of school 2019. It's Kevin Hale on how to evaluate start-up ideas. You can find Kevin on Twitter at high like Fest and it's not too late to sign up for start of school. The question started and the deadline to sign up is August 4th select companies to complete the course will also receive $15,000 in equity free funding sign up for free at start of school. Org. All right, here we go.
00:00:42Okay. So this is how to evaluate start-up 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 start at school has a lot of people's challenges Year's curriculum was like, oh this is much more advanced as 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 is a main reason why a lot of people are only able to work on their startup sometimes part-time. Yes, they might be stuck with resources, but they didn't have conviction. They didn't know like oh, what would I have that believe in order to say like, I'm going 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 Pettit, how do you evaluate if you need to do that? And then also if your pivot into something
00:01:42How do you evaluate whether something is worth going to and if you want to have a launch company, then you might have prompted likewise in this growing or how do I improve it and evaluating you shut up pushing away that sort of Adventures evaluate startups ideas. We find a really really useful.
00:02:02This is like myth about Y combinator is that people think YC only funds companies with tons and tons of traction right about now a days the only way to get the white see you have to have lots of Revenue or tons of users already and part of that has to do with like the press and then the exposure of the companies that make up the 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.
00:02:37Single non-technical founder who pitched an idea to YC and you 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 edit. My experience in NYC is actually exactly the same as when I founded boofoo and we entered that second batch. We also had not ridden a single line of code PG had invested us, but just the idea and so I feel fully committed now as a partner to always be trying to find a dedicate time and energy to funding companies. We're just at the idea States a lot of our efforts here from working on Startup school. Is that help us?
00:03:15Help you were gone 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. So by the time the Sounders get in the way when they're telling their narrative.
00:03:31So, how can I predict if an investor will like my idea that salt Emily or trying to figure out and dances really easy? And so for us at YC, the definition of a startup is a company that is designed or created the try to grow very quickly. So if you're not trying to build a company that grows very very fast, then you just pulling over company to small business and there's nothing wrong with that but these companies are the ones that investors are interested in. So if you're looking to build something that will have tons of users that will have huge valuations. I'll be able to attract better funding than the evidence that we want is evidence that shows that your company can grow quickly.
00:04:19I have a confession to make if you ever meet me or talk to me about your startup and kind of recruiting right one of these events. I will never tell you. I do not like your idea.
00:04:34And there's a reason for that that is not to be nice to you as not to blow smoke up your ass. I'd learned this way of thinking from Paul Graham. He says like look the average investor or lot of investors that you see when you talk to them about your idea. It feels like they're trying to poke holes in your idea to try to figure out what's wrong with it. And then I tried to show how smart they are and he explained that like his job in the way. He sees I work at YC is that it's not to figure out what's wrong with the company, but the figure out how it could possibly win cuz are bats the ones that when are the ones that are non-obvious right? And so for us to figure out the non-obvious stuff, it's going to snow. Sound obvious when they first tell you and so we have to like work on our imagination. We have to work on our optimism the figure out. What is the way that whatever story that they're telling me it could become.
00:05:34A billion dollar company and then a great investor pitch is that back to the founder? I figure out all the ways that I think whatever you was doing could possibly become big and then I'm trying to convince you that this is what needs to happen so that
00:05:50I would have the evidence for that. You will be on the right path. And company that grows quickly.
00:05:57A startup idea is basically a hypothesis and this 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 basic of 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 accurately describes or over describe a lot of different parts. So I'm the break of 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 even before we start even building anything we can have an understanding of like, oh, here's the position of path of this company or here's the thing. I need to prove the show that this company could do. Well, so the first is the problem so start a body is composed of three parts. The first part is a problem and it's basically the initial conditions.
00:06:57You have to explain to me. Like 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 it within those conditions for it to grow really quickly. And the third is what your Insight to 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 of always trying to figure out when I'm listen to someone's pitch. Here's a tip for talking about the problem what to know whether your problem. Your initial conditions are correct.
00:07:36The person is good problems the popular so 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 like is it growing at a rate that like more and more people going to be having the problem. It's going faster than other people's or other types of problems.
00:08:01We 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.
00:08:14We like problems that are mandatory. Right? So therefore it's like people have this problem and they have to solve it.
00:08:22And then we like problems that are frequent ones that we were going to encounter over and over and over again and often in a frequent time in a bowl. So would you want to have is like some aspect of the problem that you working on?
00:08:37At least one of them and it's ideal if you have multiple. 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 is probably missing some of these characteristics.
00:08:51the last one about frequency is super important because
00:08:56I like problems and you'll find a lot of the YC Partners like problems a lot that gives people a lot of opportunities to convert part of that has to do with something. So BJ Fogg is a researcher at Stanford and he tosses his formula up all the time. He says basically for trying to change someone's Behavior.
00:09:18You have three things you need to have in place. You need to have the motivation debility in the trigger and they need to all happen at the same time. So the motivation is like I have this problem. I need to solve where did it whatever it is. The ability is your startup molasses to trigger. What's going to be the thing that gets them to all of a sudden realize I need to saw that with your thing. That's a lot of companies will have like I build something but for some reason no one signing up or like they're not using it or not engaged. I have no retention a lot of times is because it's like you're hoping that he was somehow just remember on their own.
00:09:52Did they have the problem and to start using you and often has most companies don't send enough for example email notifications or triggers or reminders or figure out ways to come back into the out or figure out ways to be back in front of the user at the right time and you can't figure out those opportunities. It's really hard to get people to switch over to using your solution service or product.
00:10:18So are ideal problems are millions of users right millions of people have it. So I people like to work on consumer companies quite some investors like the focus on them. We like markets that are growing 20% a year. The problem is growing quickly.
00:10:34We like problem as well as people trying to solve it right now immediately.
00:10:39We like Brahms that just cost a time so billions of dollars, right or at least they all add up to some billion-dollar total addressable Market.
00:10:49We like problems with the law has changed the law has changed and regulation is put up there. And now people to solve a bunch of Palms sea salt on of Healthcare Palm Healthcare startups were born after Affordable Care. Act was passed a lot of that had to do with it was now all the sudden opportunity this problem that all these Hospitals and Clinics had to solve and then when I promise that people need to solve multiple times a day or we'll use it multiple times a day bass. What's a good classic example of slack at All American Games and using it multiple times a day during the week work day?
00:11:31Solution so that this pretty much only advice I really have for the solution. That's the best advice that you can ever follow and that is don't start here. So what I mean by that is a y c we have an acronym for problem that we try to avoid or basically an application. We have to go like oh man. I wish they had started with a problem first. We call it s i s p s means solution in search of a problem and often what happens is like you're an engineer you're excited about technology some new technology has come on the scene that say it's blockchain, right but say it's like react native or whatever. The new thing is. I want to build something with this reason why you start working on a project and then you go like, okay.
00:12:23Whatever. I'm going to self 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 too much more difficult way to grow the company. It's not impossible for companies to grow this way but super inefficient. It's much better to be like, let me see what problems people have to 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 like brand a problem as something that people have and it's so much more difficult you end up going much more as a result. So look at what your building right now or look at the reason why you trying to do the 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 users customers issues.
00:13:17The last one's a little tricky its what is the Insight? What's the reason why this solution is going to work and this is where a lot of companies are to get tricked up because it's it's really about like what is your company's unfair Advantage? Why are you going to win versus everyone else? Are you going to get the fastest one to sort of grow? Cuz that Insight is what's needed for the investor to choose you over anyone else.
00:13:45And it has to be related to growth you have an unfair advantage that explains why you're going to grow quickly. If it's not related to that then it's not it's not going to be something that investor is going to find out unless you need one. You can't just be like, I have a problem and solving it and I 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 thought through this problem.
00:14:14Right. And so let's go through the types of unfair advantages that your company have soda side different types and companies do not have all of them really great ones surprising not surprising will have all of them and we'll go through two examples, but you want at least one and it's nice having out of two or three but for most of you probably just one so the first one so how do you know if you have a Founder unfair advantage and to all of these will be connected to numbers actually which will help us make this really easy. He's like, are you one in ten of all the people in the world?
00:14:56Who can solve this problem? Are you super expert?
00:15:00And 99% of the people we find out why see do not fall into that category. And so if you think it's like well
00:15:09Product manager at Google there's a lot of product managers at Google if you say you're an engineer at Microsoft. It's like great but it's not one that will make me think. Oh you have a greater on Fairbanks and that's one 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 like a special patent to be able to cure some kind of disease then you have a Founder advantage.
00:15:39Your Market is it growing 20% a year like by default if you just build a solution in the space, you should just automatically grow cuz you're just following a trend.
00:15:53If this is your only company Advantage, then it's one of the weakest ones that you can have. It is great to be in that space But you want to have something in addition to this like you're going to do like better-than-average because you picked the right problem space and the right side of customers that want your problem. But again, if you're in a market that is stagnating or shrinking that you're going to have a long-term viability every company as a result.
00:16:22Product does super simple is your product 10x better than the competition if it is then you potentially have an unfair advantage and 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, but I just like 2x or 3x again. That's nice, but it's not enough for an investor to go like all this is a slam dunk in regards to that 10 x products and showing that you are able to have that later in startup school going to do electron pricing and we'll talk things about cost and value and I will help you sort of better understand as I know how to better prove out that 10 multiple using service 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 goo
00:17:22Why didn't you show your CAC and LTV that you were able to prove that you have a sustainable sort of acquisition model. I don't want you to know that if paid acquisition is the only way that you were able to grow your company then how many discount. Channel of growth great lake that is because if you actually get really popular can you actually start being someone significant? Let's say becoming a hundred billion dollar Revenue company, then a lot of competitors in the space and that Advantage is going to quickly Wendell over time is really good example of this acquisition and paid and it was a 8 through that was almost nowhere else for them to sort of go.
00:18:03You want to find acquisition pants that cost no money in my favorite companies the ones that become really great are the ones that can grow by word of mouth. Is it 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 accomplished is like do I have an advantage that is free.
00:18:37And the last one is a monopoly and so we don't mean this in the monocle Monopoly game sense. So we made it as like as your company grows. Is it more difficult for you to be defeated by competitors? Do you get stronger? And so a good examples of that are like comedies with network effects and marketplaces marketplaces work tends to be a winner-takes-all A1 company will tend to win and network effect is just basically as my network Rose the strength of my company and the value of the product or service also grows with it. Not every company has it when when you do have that works out great.
00:19:21There's something to keep in mind also at 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 often times for me? It's like oh them building it can they even build it? 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
00:19:56I'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 for a while. That's a nice a really simple. So if you are heavy engineering team again the default as 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 how to work through that and make that happen. And so all of my work with most of those companies is like not working on projects like hey, alright, let's prove this other thing that if you have that I'll be the thing that actually will help people go by OSHA to have the super combo.
00:20:51It's got some quick examples. So y c is a good one because we like to think of myself as a start-up. So the problem the way Woodward. This is It's hard for Founder's to raise money without knowing someone and venture-capital set the time. It was started. You basically had to be an inside her house. The only way you can sort of get money and that's never stopped and the solution that basically program came up with is like investing companies to an open application. You don't need to know any one. You just tell us your idea. Tell us a bit about yourself. That should be enough for you to get funding.
00:21:31Now there's a bunch of unfair Advantage. Is that why she had never won the founders of pretty incredible. So Paul Graham had wrote a textbook on lisp RTM like wrote the very first time he look amazing programmer and they had built and sold the first SAS company. That was Pia web to Yahoo. So they were kind of expert at evaluating technology and also understanding kind of starts in that whole process.
00:22:02The market basically believe that future billion dollar companies will be technology companies to be powered by software and the wonderful thing about that companies, especially at that time was more so I was making a cheaper and cheaper for software companies to be started and they probably needed a whole lot less money and he could make a lot more about that than the product. So basically, you know,
00:22:31They pay Founders the Comfort 3 months to get some advice. They work on their product for Rosalie small amount of money. And then at the end of the time instead of working space they work from their own home and then they pitch to a bunch of different.
00:22:48Investors and idea was like that would be so valuable to a potential founder had no connection that it would attract a lot of really great lines for a lot of people who are hungry to get into the space.
00:23:01Acquisition to realize this is like PG was able to sort of build up YC and attract the right talent because hit a huge reach your audience when he got started God written textbook. Yes, but he also brought all these popular online essays and a large audience of his Target users hackers.
00:23:21To come in a bag with this product and you can acquire them relatively cheaply just by making website and letting it be known.
00:23:29And then the last one is something he didn't even realize when he started YC. And that is that as the YC Alumni network crew. They got more powerful and more valuable over time.
00:23:40The results are funded mm companies Founders Day the CEOs of some of the biggest companies in the world. They are over 15 companies worth a billion dollars over a billion dollars does 93 comes with over a hundred million dollars and our total market capitalization is over a hundred billion dollars, but you one more example with you guys. This is my startup and it's an online form and serve a builder and it was basically a website needs to collect some kind of data at some point, but you need to know
00:24:15I told or higher 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.
00:24:33So very quickly the market it's kind of ridiculous. Like we were ass in the early days calculate R Tambo. It was like everyone else that needs to I don't really understand like what website does it need a form eventually had a lot of Saguaro really really quickly. Our product was easy Sean to be 10x faster and against the direct competition with other builders because it was so much passion to do the dragon dropping and Visually see and then I'll usually 100 x faster than like a lot of traditional routes are very custom forms for hiring a programmer and very cheaper because we had this premium model.
00:25:09That also lets you an acquisition unfair advantage and so we actually had started off with building a Blog and building an audience as well start off with a hundred thousand developer subscribe to our blog. We launched out to them after building up that audience for a year and that's actually what we applied. Do I see where this like we had built up this audience. We have proved that all these other things are like in place and then part of the other acquisition models that you can embed these forms on people's websites and then our users basically spread our form and software for us as a result. We never had that many salespeople. The results are Prada bags used by every industry market and vertical you can imagine the cons of super large companies and we did this with a relatively small amount of team when we were acquired. We were weird outlier to make sure all the other Acquisitions the average company raises only phrases like 25 million dollars before an exit and this is their average return and Peru Foo.
00:26:09118000 for the whole life of the company and our returns over three thousand percent.
00:26:17Okay. So Indiana, this is very simple exercise with super and lightning would you actually go through it and try to figure out that narrative in story? So I turn it back to you go through. I tried to answer those questions about problem 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.
00:26:49For next lecture would have talked about the first ways. We tried to prove it out to basically test our hunches and that is by talking to users.
00:27:01Alright, thanks for listening. So as always you can find the transcript and video at blog. Y combinator. Calm and if you have a second, it would be awesome to give us a rating interview wherever you find your podcast. See you next time.

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