Class Notes: How to Start A Start Up by Sam Altman (Y-Combinator)

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  • Look and be hungry for hyper growth.
  • Four main areas – idea, product, team and execution. If you concentrate in these areas, these are all areas which you can control. Start ups are even playing fields.
  • You should never start a start up, for the sake of it. If you feel compelled by a particular problem. Passion first, reason second. Great execution is far more important than a good idea. Poor execution is never a reason.
  • Your idea will take you on a 10 year project, it will expand and become more ambitious . Your idea someday should be very difficult to replicate. You idea comes first, the start up second. Work on the ideas which you think about all the time.
  • Good start ups usually take 10 years. The idea will expand. It will grow.
  • Be mission focused. The best ideas look terrible at the beginning. The 13th search engine? The 10th social network, for students who have no money. Strangers staying on couches? They sound bad, they are good. If they are good, why are people already working on it? The idea comes first, start up second.  You want to be the monopoly in the market.
  • If people don’t like your idea, good they wont compete with you. Be mission orientated. 
  • You want to sound crazy but actually be right. You want an idea which people are currently are not working on. Your first idea should, sound like a bad idea but actually is a good idea. Your market should be big 10 years from now. Don’t focus on the growth rate of the product, but the growth rate of the market.
  • If it takes more than a sentence to describe your idea, it probably is too complicated
  • Were going to be x for x – usually fails – why? Poor vision.
  • Meet potential co founders. The best start ups are mission orientated. if you have multiple ideas – focus on the one that really matters and you think about the most.
  • Think of the market first. Then the idea. Really focus on the market. Then revert the market back to the idea.
  • Exercise, eat, sleep and build and Focus on the users, and do they really love it.
  • Focus on a small number of users love, rather than a large number of user like.  dont expand something that a few people like. If you make people something love. People will tell their friends about it. This is organic growth. This makes sense. This is right. If you don’t get early organic growth. Your product is probably not good enough.
  • Great products win. If they don’t love it. You are not going to move forward. Start with something very simple. Think of every great product you love? Generally quite simple. Simple is good. Because it makes you focus on doing something small really well.
  • Recruit people by hand early on. Talk to them, Pintrest owner – went itno Palo Alto and put every screen to Pinterest homepage. Do what ever you need to make them love you.
  • You should always be looking for feedback.
  • Concentrate on growth. And be brutally honest. If its not growing, then you have not made a product people love.
  • You cant not create a market that does not exist. You want a market that is going to grow really fast. Where is this happening?
  • Work in your customers office. If you are going to start a fast food chain, work in fast food chains.
  • Why now – why is this a great time for this product.
  • Most people think first of what they want to express or make, then they find the audience for their idea. You must work in an opposite angle. Thinking first of the public. You need to focus first on their changing needs. The trends that are washing through them. Beginning with their demand. You create the appropriate supply. 50 Cent. 
  • Talking to customers, on the computer building. You have to build something users love. Not much else matters. Talk to users, build something they love. Start up fails because users like. A lot of good on paper start-ups, fail because they make something people like.
  • If you only get week enthusiasm, you have failed. It is not slammed dunk. When you make something people love, they tell their friends about it, you will see organic growth.  If you don’t see organic growth to begin with you,then you probably don’t have a great product. Very few start ups fail because of competition.
  • First version of Facebook, Google, iPhone. Simple is good – because it forces you to do something simple you have to make it good.
  • Ben Silverman – Pintrest founder, didn’t spend all day on Google ad words, but actually focused running around coffee shops – telling them will you use my product. Do what ever you need to make them love you.
  • Build an engine in a company that will give you feedback. What do you like? What would you pay for? What would make you recommend it? Don’t forget feedback loops.
  • Take the sales and customer service calls yourself.
  • You need conviction in your own beliefs. and a willingness to ignore peoples neigh saying. Their is right on one side of the line and their is crazy on the other side. You want and idea that “you know this sounds like a bad idea, but here is specifically why it is a good idea.” Unpopular but right.

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A startup is a company designed to grow fast.

Startups are so hard that you can’t be pointed off to the side and hope to succeed

You have to know that growth is what you’re after. The good news is, if you get growth, everything else tends to fall into place

A barbershop isn’t designed to grow fast. Whereas a search engine, for example, is.

Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning.

To grow rapidly, you need to make something you can sell to a big market. That’s the difference between Google and a barbershop. A barbershop doesn’t scale.

“For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people. Barbershops are doing fine in the (a) department. Almost everyone needs their hair cut. The problem for a barbershop, as for any retail establishment, is (b). A barbershop serves customers in person, and few will travel far for a haircut. And even if they did the barbershop couldn’t accomodate them.”

If you’re going to start a company, why not start the type with the most potential? The catch is that this is a (fairly) efficient market.

The constraints that limit ordinary companies also protect them. That’s the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.

A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken.

That space of ideas has been so thoroughly picked over that a startup generally has to work on something everyone else has overlooked.

What’s different about successful founders is that they can see different problems.

Rate

At the beginning of his career, an actor is a waiter who goes to auditions. Getting work makes him a successful actor, but he doesn’t only become an actor when he’s successful.

So the real question is not what growth rate makes a company a startup, but what growth rate successful startups tend to have. For founders that’s more than a theoretical question, because it’s equivalent to asking if they’re on the right path.

The growth of a successful startup usually has three phases:

There’s an initial period of slow or no growth while the startup tries to figure out what it’s doing.
As the startup figures out how to make something lots of people want and how to reach those people, there’s a period of rapid growth.
Eventually a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves. [5]

If there’s one number every founder should always know, it’s the company’s growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly.

When I first meet founders and ask what their growth rate is, sometimes they tell me “we get about a hundred new customers a month.” That’s not a rate. What matters is not the absolute number of new customers, but the ratio of new customers to existing ones. If you’re really getting a constant number of new customers every month, you’re in trouble, because that means your growth rate is decreasing. 10% each week growth.

During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they’re doing.

A good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.

The best thing to measure the growth rate of is revenue. The next best, for startups that aren’t charging initially, is active users.

Compass

1) pick a growth rate they think they can hit, and then just try to hit it every week.

2) The key word here is “just.” If they decide to grow at 7% a week and they hit that number, they’re successful for that week.

3) There’s nothing more they need to do. But if they don’t hit it, they’ve failed in the only thing that mattered, and should be correspondingly alarmed.

Whatever gets you your target growth rate. 

Judging yourself by weekly growth doesn’t mean you can look no more than a week ahead. Once you experience the pain of missing your target one week (it was the only thing that mattered, and you failed at it), you become interested in anything that could spare you such pain in the future.

Having to hit a growth number every week forces founders to act, and acting versus not acting is the high bit of succeeding. Nine times out of ten, sitting around strategizing is just a form of procrastination. Whereas founders’ intuitions about which hill to climb are usually better than they realize. Plus the maxima in the space of startup ideas are not spiky and isolated. Most fairly good ideas are adjacent to even better ones.

The fascinating thing about optimizing for growth is that it can actually discover startup ideas. You can use the need for growth as a form of evolutionary pressure. If you start out with some initial plan and modify it as necessary to keep hitting, say, 10% weekly growth, you may end up with a quite different company than you meant to start. But anything that grows consistently at 10% a week is almost certainly a better idea than you started with.

Value

It’s hard to find something that grows consistently at several percent a week, but if you do you may have found something surprisingly valuable. If we project forward we see why.

weekly yearly
1% 1.7x
2% 2.8x
5% 12.6x
7% 33.7x
10% 142.0x
A company that grows at 1% a week will grow 1.7x a year, whereas a company that grows at 5% a week will grow 12.6x. A company making $1000 a month (a typical number early in YC) and growing at 1% a week will 4 years later be making $7900 a month, which is less than a good programmer makes in salary in Silicon Valley. A startup that grows at 5% a week will in 4 years be making $25 million a month.

Startups often raise money even when they are or could be profitable. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster. Raising money lets you choose your growth rate.

Pretty much every successful startup will get acquisition offers too. Why? What is it about startups that makes other companies want to buy them? A rapidly growing company is valuable. It’s a good thing eBay bought Paypal, for example, because Paypal is now responsible for 43% of their sales and probably more of their growth.

If you start from the mistaken assumption that Instagram was worthless, you have to invent a secret boss to force Mark Zuckerberg to buy it. The reason he bought Instagram was that it was valuable and dangerous, and what made it so was growth.

If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why VCs want to invest in startups: Growth explains why the most successful startups take VC money even if they don’t need to: Growth explains why successful startups almost invariably get acquisition offers.

It’s not just that if you want to succeed in some domain, you have to understand the forces driving it.

Understanding growth is what starting a startup consists of. What you’re really doing when you start a startup is committing to solve a harder type of problem than ordinary businesses do. You’re committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be a research scientist: you’re not committing to solve any specific problem; you don’t know for sure which problems are soluble; but you’re committing to try to discover something no one knew before.

So whatever market you’re in, you’ll usually do best to err on the side of making the broadest type of product for it

What if a company grew at 1.7x a year for a really long time? Could it not grow just as big as any successful startup? In principle yes, of course. If our hypothetical company making $1000 a month grew at 1% a week for 19 years, it would grow as big as a company growing at 5% a week for 4 years.

Acquisitions fall into two categories: those where the acquirer wants the business, and those where the acquirer just wants the employees.