13 Insights from Y Combinator That Every Founder & PM Needs to Know (🍕#3)
This is what the number one accelerator in the world wants you to know when starting a company, and how you can immediately test and implement them.
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If you’re a startup founder, then you’ve most likely heard of Y Combinator — the number one tech accelerator in the world.
YC, as it’s more commonly called in the industry, knows exactly what they are doing when it comes to validating founders’ ideas, building something people want, and scaling them up to raise outside capital. Their methodologies and ideas have helped billion dollar companies like Airbnb, Dropbox, and Stripe.
There’s good and bad news.
The bad news is that getting into YC is harder than getting into Harvard, just over 300% harder. According to Hackernoon, the acceptance rate is just 1.5%.
The good news is that YC runs a free 8-week online program called Startup School. YC not only gives founders a huge variety of deals and benefits (including $5,000 in AWS credit), they also teach their fundamental insights and approaches to starting a great company.
As a founder that has graduated from Startup School, I’ve revised and condensed what my team and I learned into the 13 most useful lessons.
1. Focus on a few, correct KPIs
You will build, optimise, and focus, on what you measure. Set just 3-4 KPIs that are meaningful reflections of your progress and relevant to your business model. Avoid distractions by leaving out any other vanity metrics.
If you want to increase the number of customers signing up, put that number clearly on the wall and plot it periodically for you and the team to track. You will be delighted when this grows and disappointed when it doesn’t. Plus, you will start to notice the factors that cause it to move in either direction. The more numbers you’re tracking, the more room for distraction you create. Make this simple by having numbers that have a material impact on your business. For instance, revenue, profit, user retention, etc.
When choosing metrics, ensure they:
Represent delivery of real value
Capture recurring value
Have a usable feedback mechanism
You should have just one Northern Star Metric (NSM). YC says that for most businesses, this is revenue.
Set your primary metric by questioning which number is most important to your business. For some companies that sell physical products, this figure will likely be revenue, for others selling ad space it may be active users. Then, decide on two or three secondary metrics. In the early stages, you don’t need a fancy dashboard, you can put these into a shared Google Sheet with your team, set weekly goals for these numbers, and track your progress.
2. Launch it already
The faster you launch, the faster you will be able to learn if you’re building the right thing. The longer you build without identifying this, the more you risk wasting your time. Launching allows you to speak to actual users and validate this assumption.
According to Paul Graham, founder of YC, “The reason to launch fast is not so much that it’s critical to get your product to market early, but that you haven’t really started working on it till you’ve launched. Launching teaches you what you should have been building.”
As a founder, one of the biggest things to consider is your opportunity cost — the loss of potential gain from other alternatives when one alternative is chosen. You want to be working on the right product as fast as possible. Before launching, you have no idea if your hours are going into the right thing. The main value of launching quickly is the opportunity to speak and engage with users.
Kay Manalac, a YC partner, encourages founders to change the way they think about launching. She asserts that it’s not one moment, it’s the second a product or feature is ready to be shipped. This could even be as small as a silent launch. An example of this type of launch could be as simple as putting a landing page up that collects email addresses to test if target users are responding to your company’s value proposition.
Your idea will constantly be changing. This is the second half of launching fast — iterate and keep shipping. It’s a big mistake to treat a startup as merely a matter of implementing your brilliant initial idea.
If you have an idea right now that you’re considering working on, validate it as fast as possible with a silent launch. You can do this for under $15 and in less than 2 hours.
Come up with a name
Buy the domain from GoDaddy
Come up with a short company description for your target audience (Not an investor pitch, here’s the difference according to MIchael Siebel, CEO at YC)
Create a landing page (try using a product called Ship by ProductHunt)
Make sure you have a contact widget, and a clear call-to-action
Share this with your intended target audience through friends, social media, Linkedin, or any other way you can think of. The idea is to test, iterate, and get feedback from users.
3. Speak to lots of users
You’re building your product to solve a problem for a set of customers. If you don’t speak to them regularly, you will be misaligned with their shifting needs and might be building something they don’t need or want — this is a waste of finite resources (time and money).
By speaking to customers, you achieve a few key things.
You understand them better
You understand how they currently solve the problem (i.e. how valuable your product is)a
You understand how/when/if they use your product
You build loyalty and maintain a direct connection with them
If you’re in the idea phase of your startup, reach out to people you envision using what you plan to build and take them for a coffee. When asking questions, make sure to:
Talk specifics, not hypotheticals
Listen to them, and talk less
Here are 5 examples of questions you can ask:
What’s the hardest part about doing *that problematic thing you’re solving*? (helps identify the most crucial thing to solve)
Tell me about the last time you encountered that problem (reveals frequency and degree of the problem)
Why was that hard? (shows how you can solve it)
What, if anything, have you done to solve this problem? (shows what competitors they use, or if they choose apathy instead)
What don’t you love about existing solutions? (insight as to how you create competitive advantages)
4. Craft your story
As the founder, you’re the head of vision and storytelling. At the early stages of your startup, a good, concise, pitch narrative will excite and compel people to get behind you and your idea more than just numbers.
Investors see plenty of great growth curves and revenue figures. And unless you’re Mark Zuckerberg pitching Facebook, the odds are that won’t make you stand out.
A story and vision for the future is what makes people remember you and bring them to conviction.
When crafting your story, a key insight is that people respond better to solutions compared to problems. This is due to problem fatigue, a phenomenon where people get so acclimated to hearing about the problem it no longer interests them as much.
Solutions, on the other hand, invite people to be a part of what you’re selling, it motivates and excites – it creates hope. It’s an invitation to work together!
Your story needs to highlight the problem and make it relatable to who you are talking to, but emphasise the undeniable future that is going to exist because of what you are making.
5. Test your hypotheses quickly
Building a business is like running a science experiment. You need to treat it as such by following the scientific method. As with any experiment, you are trying to prove something as either true or false. With a startup, you need to test and validate your hypotheses (assumptions) as fast and reliably as possible.
According to “The Lean Startup”, by Eric Ries, there are two vital assumptions to any startup that you need to be validating.
The Value Hypotheses:
The product/service we are building adds value to our customers.
If you’re not testing this, you have no idea if you are either solving a problem worth solving or building the right solution to it.
The Growth Hypotheses
This is a test of how new customers will discover your product or service.
Your growth hypothesis needs to explain your business’s strategy for obtaining and retaining customers so it can eventually transform those customers into a sustainable source of cash flow.
A startup is differentiated from a small-medium sized business based on the premise that it can scale. As a founder, you need to be experimenting with how you will acquire customers, and validating things like:
Are my expected growth channels viable? (am I investing in the go-to-market strategy)
Is my CAC viable? (am I going to run out of money or not getting new customers)
Is my product sticky? (do I have good retention rates)
A startup is contaminated with risk and uncertainty. Your job as a founder is to de-risk the investment, not only for yourself, but for your team and future investors too. It is crucial to understand and validate both your value and growth hypotheses before moving ahead with execution (and risking burning through cash and time).
6. Ask for help
One of the best lessons I learned from my uncle (and co-founder), is that the smartest man in the room is the one that can learn from anybody.
It doesn’t matter where you are in your journey starting a company, no one is too good to ask for help and anyone could stand to benefit by simply asking. There are huge communities of founders and entrepreneurs out there who are more than willing to help wherever they can. After all, they’ve been where you are and value being able to share their experience and know-how.
Ask friends, family, colleagues, or broader communities such as on Facebook pages for help reviewing your landing page, helping with your pitch, or introducing you to some investors or potential customers. Just ask, and I guarantee someone will help out for free.
7. Do things that don’t scale
The science of business is doing things that scale, but the art of it is doing things that don’t.
In the early days of Airbnb, Brian Chesky and his co-founders personally went around New York City to take photos of their host’s locations in order to provide travelers with a better booking experience. This was not scalable and they certainly don’t do that today. A similar story lies with Uber.In their upstart days, Uber manually matched drivers to passengers using just basic phone GPS, Excel sheets, and humanly sent SMSes! No fancy algorithms at all.
The benefit of doing these unscalable tactics, besides creating founder-user connections, is that it helped them validate that this was worth doing without investing in expensive technology to do this at scale.
All your experiments in the early stages do not need to be scalable. Scalable solutions take more time and resources to build and implement — two commodities you likely don’t have.
One thing that Paul Graham emphasizes is that you should focus on having exceptional customer support. He says, “Go out of your way to make people happy. They’ll be overwhelmed; you’ll see. In the earliest stages of a startup, it pays to offer customer service on a level that wouldn’t scale, because it’s a way of learning about your users”
Think about something you are planning on automating in order for it to serve many users. The truth is, you probably don’t have all those users yet and can suffice with cheaper, more guerilla tactics before building something more robust.
Don’t be afraid to get your hands dirty, you’ll learn a ton by doing something inefficiently.
8. Know how you will make money
You need to have a simple revenue model that explains how you get cash into your bank account in exchange for the value you are giving users. Remaining free until you have millions of users and ad revenue to pay your bills is not a luxury you have or an answer that will likely get you any investment.
Cash is king. You need it to pay your team, bills, and hopefully sooner rather than later, yourself.
What’s your business model
Here are some examples of business models in the tech space, each having different metrics you should be tracking.
You sell your software to other businesses on a single-license basis. These contracts have fixed terms and designated contract values.
Here you’re selling cloud software-as-a-service through a subscription model (could be annual or monthly terms)
You’re billing your customer based on their usage of your product or service over a given period
A subscription company sells a product or service, usually to a consumer, on a recurring basis (monthly or annually)
You collect a fee for enabling a financial transaction on behalf of a customer
With a marketplace, you collect a percentage of the total transaction value in the sale of a good or service that goes through your intermediary platform
An e-commerce company sells physical goods online.
An advertising company offers a free service to consumers and derives revenue entirely, or predominantly, from advertisers. Common advertising companies include social networks, content sites, and publishers.
You sell physical devices to consumers or businesses.
9. Price your product correctly
When pricing your product, you need to consider three variables: price, cost, and value. And the price is not what’s important, it’s understanding your value.
Kevin Hale, a YC partner, led a fantastic lesson on startup pricing. The biggest takeaway is best illustrated by this diagram.
This shows that you are making your profit between the price you are charging for your product and the cost to produce it. The greater your profit margin, the greater your incentive is to keep selling it, and the more you can further your operations. Value is how useful your product is perceived to be by your customers or how much people want it. For instance, if you’re selling a SaaS product for $100 per month, but it enables your customers to make $1,000 per month, your value is $900. The more value you create for your customer, the more you can charge.
You can be selling your Enterprise product for $10,000,000 a month if you know it yields $15,000,0000 in value to the customer. Value can justify any price.
Another thing startups need to be cautious of is not underestimating your costs. Be continuously testing and optimizing your prices to find the best conversion rates.
If you’re going to be looking to raise institutional money, you will likely have to justify a $1B valuation at some point — so here’s the billion-dollar valuation formula to consider when pricing.
$Price x #Customers = $100M revenue per year
10. Become a master of coin
A startup needs to be cheap and efficient. The goal is to reach a point where you’ve validated your idea, and made something that people want, use, and are paying you for. Most startups fail before making it to this point of product-market-fit, and the most common reason for failure is running out of money.
You need to be extremely frugal with your spending and vigilant of all the money coming in and going out. This is known as your burn (rate of going through cash in the bank), and your runway (how long until you have no more money). Your runway is how much time you have to build something people want enough so that your money-in is greater than money-out.
By being cheap, you run lean and will be spending on only those things that contribute meaningful value.
You need to be radically truthful with yourself as to where you stand and embrace reality. Cut unnecessary expenses and give yourself the best chance at reaching PMF, as well as reaching default alive status
11. Prioritize your time, and make you time
Time is scarce. If you don’t have a tactical way to use it, it will use you. As a founder, you need to focus on tasks that have the most impact in your startup but also be sure you allocate time for your personal hobbies and self-care.
For instance, are you making time for:
All of the above are important and you need to make sure you are making time for the things that matter beyond your startup. If the only thing consuming your time is work, then you will face burnout (an issue faced by 50% of founders) and risk resenting your choices. Your startup certainly requires a great deal of your time, but your health and well-being are arguably more important. You need to be making time for those other pillars.
Real vs fake progress
It’s easy to get caught up doing tasks that are quicker to get through yet don’t actually tick the needle for your business. These make you feel like you’re making progress because you’re physically moving through your task-list, but this is just delivering points to your ego.
You want to be focusing on more complex tasks that deliver real value to your users.
This requires task prioritization, where you look at two components.
The impact of the task on your monthly/weekly goals (rank as high, medium, low)
The complexity of the task (rank as high, medium, low)
Focus on the high/easy and high/medium tasks first as they deliver the most value. Make your way through your priorities this way until you’re doing the low/low tasks.
A popular principle related to this is the Pareto Principle, which suggests that 20 percent of your activities will account for 80 percent of your results.
Nothing kills startups like distractions. The worst types of distractions are those that pay money: day jobs, consulting, or profitable side-projects.
If you want your startup to succeed, it needs all of your workable hours. If you have other calls coming in or tasks that can pay you immediately, you will be interrupting your time and progress toward building something that probably has more long-term potential. The moment you can afford to be full-time and leave any other job is the moment you should.
According to Elon Musk, the biggest productivity hack for task prioritization is using a calendar instead of a to-do list. The reason behind this is it forces you to be more focused and accountable with the use of your use of time. Each week, take a couple of minutes to allocate time for yourself (i.e gym), schedule a few calls with friends and family, and then schedule time slots for tasks on your list.
12. Start with a good co-founder
The success of a startup is always a function of its founders. Everything about your startup can be changed easily, except for your co-founders. Choosing who to partner with is the single biggest decision you will make.
As a founder, you are embarking on a very long and hard road. This is not something you want to do alone. There’s a myriad of reasons why you should want, and need, a co-founder. Here are three:
Someone next to you when the going gets tough (and good!)
Someone to complement your skills and experience
Diversity in leadership and opinions
Don’t worry about giving away equity to a co-founder. If you are in the early stages, your company is worth nothing anyway. Plus, by bringing on a co-founder, you drastically increase the chances of success, thus making your equity worth something.
If you’re non-technical, it’s wise to bring on someone who can write code for you. Choose someone you know and trust.
Assess your strengths and weaknesses, and evaluate what skills you want your co-founder to bring to the team. Don’t just pick a roommate because he’s your friend, you need to be able to clearly define your roles based on skills and experience.
Becoming a founder is hard and will truly push you to your limits. The peaks are high and the troughs are low, but the experience you will gain along the way is irreplaceable. Even if your startup fails, you’ve invested in your biggest asset — yourself.
Learning is the key, and the best way to learn through your journey is to continuously ask hard questions and practice vigorous feedback loops.
The biggest takeaway from Startup School that I’ve seen in practice is the value of understanding your users. The reason your startup needs to exist is to create wealth.
As PG says:
“The dimension of wealth you have most control over is how much you improve users’ lives; and the hardest part of that is knowing what to make for them. Once you know what to make, it’s mere effort to make it, and most decent hackers are capable of that”
Starting your own venture isn’t easy, and there will be times where things all seem stacked against you, like nothing is working and it’s all a mistake. Believe me, no ride just goes up. Also, as hard as it may be, getting comfortable with the fact that this idea might not be “the one” is important — because your first one probably isn’t. As long as you are constantly honest with yourself, you’re asking hard questions and seeking objective truths — you will be fine.