When it comes to the world of tech start-ups and Silicon Valley, you’ll struggle to find a more respected and influential start-up incubator than Y Combinator. Founded in 2005 by Paul Graham, Jessica Livingston, Trevor Blackwell and Robert Tappan Morris, it has helped some major companies get off the ground and find a workable business model. Y combinator alums include Dropbox, Airbnb and Reddit.
Getting into Y Combinator, as you might expect, isn’t easy. Two batches of around 50 to 100 start-ups are accepted every year. That might seem like quite a lot, but it’s estimated that the incubator receives between
1 000 and 2 000 applications for every intake, with only 3% of start-ups actually making the cut. And even if you get in, you’re expected to move to Silicon Valley for three months to work closely with the folks at Y Combinator. For many start-ups, especially international ones, this can be difficult to do. Not only is it expensive, but moving a whole business to San Francisco can be impractical. So, while many founders would love to grow their businesses with the help of Y Combinator, few can actually achieve this dream.
However, even if you can’t attend Y Combinator personally, you can still learn a lot from the incubator. According to Sam Altman, the current president of Y Combinator, about 70% of what the mentors discuss at the incubator is specific to the start-ups they deal with, but the other 30% is generic and applicable to all, and this info has been made available to the public.
Y Combinator, along with some very prominent and influential guest lecturers, hosted a series of lectures at Stanford in 2014, and these sessions were recently released in podcast form. Every lecture is incredibly dense, packed with fantastic advice and insights. It is definitely worth listening to every single one in its entirety. You can find the episodes on podcast platforms like iTunes, or you can visit startupclass.samaltman.com for videos of the lectures, as well as annotated transcripts and other resources.
There’s nowhere near enough space here to discuss all the info provided, but below you’ll find some of the most interesting tips and lessons from the various lectures. Specifically, we’ll be looking at the counter-intuitive insights that are only gleaned from years in the trenches.
1A great idea doesn’t look like a great idea
“The hardest part about coming up with great ideas, is that the best ideas often look terrible at the beginning. The thirteenth search engine, and without all the features of a web portal? Most people thought that was pointless. Search was done, and anyway, it didn’t matter that much. Portals were where the value was. The tenth social network, and limited only to college students with no money? Also terrible. MySpace has won and who wants college students as customers? Or a way to stay on strangers’ couches. That just sounds terrible all around.” — Sam Altman, Y Combinator President.
Lesson: The obviously ‘great’ ideas are already taken. As Altman says: “If they sounded really good, there would be too many people working on them.” So, you want something that doesn’t seem like a truly great business idea at first. This means facing a lot of risk and rejection, but it also provides great opportunity. The alternative, argues Altman, is a clone of an already-existing idea with a small or made up differentiator, and these businesses don’t tend to last.
2Looking for a great idea is not a great idea
“The way to get start-up ideas is not to try to think of start-up ideas. If you make a conscious effort to try to think of start-up ideas, you will think of ideas that are not only bad, but bad and plausible sounding. Meaning you and everybody else will be fooled by them. You’ll waste a lot of time before realising they’re no good. The way to come up with good start-up ideas is to take a step back. Instead of trying to make a conscious effort to think of start-up ideas, turn your brain into the type that has start-up ideas unconsciously.” — Paul Graham, Y Combinator Founder
Lesson: Great start-up ideas tend to pop up when you’re not actively trying to start a business. A lot of great companies, like Google, Facebook and Apple, were not started as businesses, but purely as side projects that interested the founders. So, follow your curiosity and don’t search too hard for an idea. The truly great ones are almost never obvious start-up ideas.
“The very best ideas almost always have to start as side projects because they’re always such outliers that your conscious mind would reject them as ideas for companies,” says Graham.
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3Competition is for losers
“You want to be a one-of-a-kind company. You want to be the only player in a small ecosystem. You don’t want to be the fourth online pet food company. You don’t want to be the tenth solar panel company. You don’t want to be the hundredth restaurant in Palo Alto. Large existing markets typically mean that you have tons of competition, so it’s very, very hard to differentiate. The first very counter-intuitive idea is to go after small markets; markets that are so small people often don’t even think that they make sense. That’s where you get a foothold, and then if those markets are able to expand, you can scale into a big monopoly business.” — Peter Thiel, entrepreneur and venture capitalist.
Lesson: Many successful, high-growth companies started out catering to markets that appeared small and unpromising at first. Facebook didn’t start off as a social media platform for the globe, it started off catering to a single university — a tiny market. Too many start-ups wade into a saturated market purely because the size of the market is tempting. A better idea is to find that small market that is ready to explode. What industry will be massive ten years from now?
4Grow big by thinking small
“My philosophy behind a lot of things that I teach in start-ups is, the best way to get to $1 billion is to focus on the values that help you get that first dollar to acquire that first user. If you get that right, everything else will take care of itself. It’s a sort of faith thing.” — Kevin Hale, Y Combinator Partner.
Lesson: Large-scale, long-term success depends on creating a product or service that truly surprises and delights your customers. The problem is, you can’t do this if you’re too focused on the big picture. If you’re too worried about building a R1 billion business, you’re not taking the time and effort to think about the individual customer experience. So, don’t look at customers as numbers on a spreadsheet, even if your business is already hugely successful. And, if your business is still new, do whatever’s needed to delight the customer, even if your approach seems unscalable. Stay true to the approach that bagged you that very first sale.
5Do things that don’t scale
“The lesson that I’ve been learning lately is that you want to do things that don’t scale as long as possible. There’s not some magical moment; it’s not Series A, or it’s not when you hit a certain revenue milestone, that you stop doing things that don’t scale. This is one of your biggest advantages as a company, and the moment you give it up, you’re giving your competitors that are smaller and can still do these things an advantage over you. So as long as humanly possible, as long as it is a net positive, you need to spend time talking to your users, you need to move as fast as possible in development, but don’t give it up willingly; it should be ripped from you.” — Walker Williams, founder of Teespring.
Lesson: Don’t worry too much if your actions aren’t scalable. View it as an advantage. The longer you can do things that don’t scale, the bigger your advantage over the competition. There will come a time when you’re too big to do these things, but don’t fret over it in the early days.
6You get funding if you don’t need funding
“I was so frustrated from this experience of having tried for two years to raise money from VCs and I sort of decided, to hell with it. You cannot count on there being capital available to you. This business that I started seemed like one that maybe I could do without raising money at all. There was enough cash flow, it seemed compelling enough that I could do that. It turns out that those are exactly the kinds of businesses that investors love to invest in and it made it incredibly easy.” — Parker Conrad, founder of Zenefits.
Lesson: Finding funding isn’t easy, especially if your company is hanging on by a thread and desperately in need of a cash infusion. The safest way to build a business is to bootstrap and become cash-positive as quickly as possible. The fact of the matter is, investors will be more attracted to a business that has proven its business model and is making money. Launch as cheaply as possible, get some traction, make some money, and then go to investors when you’re ready to scale.
7Growth is as much about retention as acquisition
“My contrarian viewpoint is, if you’re a start-up, you shouldn’t have a growth team. Start-ups should not have growth teams. The whole company should be the growth team. The CEO should be the head of growth. Mark Zuckerberg is a fantastic example of that. Back when Facebook started, a lot of people were putting out their registered user numbers. Mark put out monthly active users, as the number he held everyone to internally, and said we need everyone on Facebook, but that means everyone active on Facebook, not everyone signed up on Facebook, so monthly active people was the number internally, and it was also the number he published externally. It was the number he made the whole world hold Facebook to, as a number that we cared about.” — Alex Schultz, Head of Growth Marketing at Facebook.
Lesson: Growing your company isn’t as simple as signing up new customers. Sure, this is important, but ultimately, retention is more important than acquisition when it comes to long-term success. You want people to stick around and continue doing business with you, so, right from the beginning, focus on retention. Make that one of the key metrics that you track and use to evaluate the business. Even if you are landing new clients at an impressive rate, it doesn’t bode well if retention is a problem. Retention says a lot more about the viability of your start-up than new acquisitions do.
Y Combinator’s events are known for their high-calibre guest speakers, including Facebook founder Mark Zuckerburg and Zappos founder Tony Hsieh. In 2014 Y Combinator hosted a series of lectures at Stanford. These have recently been released in podcast form.
How to Start a Startup can be downloaded from iTunes or for videos of the lectures, go to startupclass.samaltman.com