Late last year, my team participated in the much talked-about Y Combinator Startup School on behalf of our startup, Affine Finance. We were assigned a great mentor (former C-level executive at Zynga and a startup advisor at multiple other prominent accelerators). It was a 10-week program, with weekly live sessions conducted both in-person and online (since I was close to YC’s Mountain View offices, I ended up attending most of the sessions in-person). The live sessions touched upon a broad range of topics — everything from legal matters to design and product development.
YC had grouped the startups that were a part of the program into teams of 10–15 companies. In order to “graduate”, the teams were required to:
1) Do weekly mentor office hours (a 2-hour group call with our mentor with all startups in our group)
2) Provide weekly company updates reporting our week-over-week growth for a self-selected metric
We were incredibly lucky to be assigned a great mentor for our startup as well as a highly engaged peer group. We consistently heard stories of mentors going MIA, peers who had stopped participating etc. which took away from their overall program experience. In effect, while the program was well-designed by the YC team, the execution of it largely fell upon the mentors and the startups themselves!
The overall learnings from the program far exceeded my expectations. By the time we joined, we had been “hacking away” at our ideas for almost a year and I didn’t expect to learn anything new besides the conventional wisdom / talking points, but I was proven wrong by the YC folks very early on! The live sessions were great, but what made the program truly effective was combining them with the mentoring session, and the peer group community. For the latter, the internal YC forums were OK but the Slack groups (formed by the startups directly) were even better and provided great value. Case in point: the Bay Area group still organizes monthly BBQ meetups for the YC SS startups — few months after the official YC program ended!
Below I have highlighted seven key takeaways for our team, which are largely based on our own experience of the program and the stage of our company when we went through it. I’m sure other founders would have had different takeaways based on their own experience.
I. “Make something people want”: you need to live and breathe the YC motto
Startups mostly fail because they work on building products that no one wants. Within the insanity of Silicon Valley, it’s often easy for founders to lose their way (which we were also guilty of at Affine) by prioritizing the wrong things — such as fundraising, over-building products/features, attacking “white spaces” without verifying the real market needs (working on ideas that only seem good on paper) — and not being laser focused on the end customers.
Make: Do you have the right team? Right mix of expertise, camaraderie, experience, passion for the industry, passion for solving problems, passion for starting a company.
Something people want: Do they really want this? Continuous market validation, customer feedback, asking the right questions (“will you pay $x for this” vs “would you try this / like to use this”) to the right people.
II. Launch now!!
Launching fast was something the YC team and the mentors stressed on a lot. The importance of launching early cannot be overstated — you cannot truly figure out what your customers want until you launch and get in front of them.
But… my product is almost ready but I still need to add some features!
…You should have launched a long time ago! Launch now and include those features in the next update!
But… my product is not yet finished!!
…Launch limited pilots with customers whose needs are so great that they are willing to work with a broken or incomplete product — this will help guide you on what to add/modify, and what features you can drop from your product roadmap. This could save you 100s of hours and potentially result in early revenue and other valuable customer feedback.
But… I haven’t even started building my product yet!!
…You have a lot of options here: Build a product outline or wireframes, and use those to get feedback from potential customers on specific needs / features; or try to get a potential customer to finance your product development with an “agency approach” where you build their solution but retain the IP; or try to pre-sell product licenses at a discount prior to building your product to test your customers’ ability to pay, and their urgency to solve the problem.
While this advice may not be applicable to a very small number of startups, for most startups there is no excuse not to launch today.
III. Product-Market Fit — the definition is in the eye of the beholder (or the investor!)
A lot of the guest speakers were asked when they found “Product-Market Fit” (PMF) and everyone had their own variation of the answer (interestingly, none of them answered they haven’t found it yet IIRC).
The answer to “How do I know when I have PMF?” is highly complicated and depends on each startup’s business model and unique circumstances. Many startups find PMF early on, and many never find it during their company life cycle (including the “successful startups” with successful exits). Some early-stage investors only invest in startups after they have found their PMF, some specifically claim to fund startups to help them find their PMF, with no consistent definition on what PMF really is.
After listening to multiple definitions and views, our thoughts on PMF loosely reflect those of the YC team: you have found Product-Market Fit if
i. you are making what people want (from takeaway #1 above; your customers would be VERY upset/miserable if your product didn’t exist), and
ii. your demand is outstripping supply such that you can’t seem to hire/build/ship fast enough (you are struggling to keep up with customer demand), and
iii. new customers are finding you organically and/or through referrals from existing customers
Point (ii) is what really stood out to me personally. This is also the point where you may likely need additional capital to hire and meet customer demand — making it a great time to go fundraising at favorable terms during your potential “hockey stick” turning point.
Again, this definition would depend from company to company, business model to business model. Right after launching, it’s worth spending time thinking about what it would mean for your startup to attain PMF — that is the point you’d strive to get to from then on.
IV. Value of your time as an entrepreneur
One of the best pieces of advice I got before cofounding Affine was from a friend who founded a digital health startup a few years ago — to do as much work as possible upfront as I’d have no time once I “officially start”. I didn’t fully appreciate that advice until after I “officially started” my own entrepreneurial journey. Think of everything on your plate as a founder: Forming your team, building your product, finding early customers (i.e. persistently following up with 1000s of potential customer leads just to get initial feedback and potentially a pilot), creating content, fundraising, strategizing, day-to-day project management — and all of these are just the basic requirements to launch something. And not to forget family time and personal time to exercise, eat and sleep.
Do you really have time to attend that flashy startup conference? What will you really get out of it? Do you have the 4 hours (+ the recovery time) for that happy hour? Is it worth spending countless hours chasing investors before you have initial customer interest? Would it make sense for you to spend X hours on design / social media posts at this stage of your project?
While only you can answer these questions and figure out your own priorities, consciously monitoring your time (and your team’s) at the early stages and appropriately allocating time could directly mean a much higher chance of success — with more time allocated to building your product and listening to customers instead of doing other pointless activities.
One of the YC speakers highlighted that a good way to think about whether something is worth spending time on is by assigning a dollar value to your time. You’d assign an annual value to your time, and then break it down to your “hourly rate”. This is not your market earning rate — this is the value you are adding to your startup. For example, if your newly launched startup has 3 cofounders, and you expect your startup to be valued at $6m by the end of the year, each of the cofounders is adding $2m in annual value to the company. If you expect to work 100 hours per week for 52 weeks per year on your startup, you’d be working a total of 5,200 hours this year, and your hourly rate would be $400 ($2m / 5200; rounded up). So, if you want to attend TechCrunch Disrupt for 2 days for 6 hours/day, that would cost you 12 hours or $4,800 in time — which is in addition to the conference tickets and other direct expenses.
V. Tracking weekly growth for one main performance metric
We had to report our weekly growth metrics to the YC team; the growth of all startups in our team was also discussed on our weekly group office hours. YC has always placed heavy weight on tracking and improving weekly growth rates. The best metric to track would be net revenue — it’s the direct measure or your growth and performance. However, since many early stage startups are pre-revenue or don’t have significant revenue, they picked other relevant metrics such as number of users, weeks to launch (not a great metric!) etc. Startups can and often do change their core metrics regularly as they grow.
We picked “booked revenue” to track our weekly growth — with a definition that was applicable to our business model. It was very humbling to see real growth rates typed out and discussed on a weekly basis — and really gave us a new sense of focus. After all the noise was stripped away, optimizing that single metric is all that mattered. While I have read and heard arguments against this tracking methodology, living through it for 10 weeks during the program convinced us on the effectiveness and importance of it. There are numerous theories and concepts on tracking metrics / measuring what matters (OKRs) and we will likely dive into those if/when appropriate — for now, the simple practice of establishing and tracking one metric worked well for us, and is a great habit we took away from YC SS.
“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.”
— Paul Graham, Y Combinator Cofounder
VI. Not all startups are venture backable, and not all will be / want to be unicorns
Another thing I’d chalk up to Silicon Valley insanity is only considering “unicorn” ideas and disregarding everything else. Founders are generally sold on chasing investors early on in today’s environment, which may not often be in the best interest. You can make something people want, and still not be venture backable — if your market isn’t big enough, if your market isn’t growing fast enough, if you don’t have sufficient defensibility — you can still build a great business, but chasing investors may be a waste of time in that case. It is perfectly OK to build a “non-venture backable” business — you should worry about your customers and making something people want, not about being a VC target. This was surprising advice from a startup accelerator that is the top hunting ground for Silicon Valley funds.
Exploring all sources of capital is crucial — even if you fall under the VC target market. VCs are in the business of investing, and hence incentivized on promoting the idea of venture funding to founders. While capital is a great tool to have to beat out your competition, you must determine if your company really needs that capital, what sources work best for you, and what partners (investors) work best for you. Fundraising too much too fast has led to the downfall of many companies, and while it may seem a “good problem to have”, your time is truly better spent building your company than chasing investors if you don’t need to. The good investors realize this too and are generally quick to commit when they are interested, and work in the best interest of founders and the companies.
At a very high level, some questions to consider when you are determining if you are “VC backable”:
- Is your target market large enough? (This must be a bottom-up number i.e. price of your product * total number of potential buyers).
Your valuation will depend on your business model, among other things. If you are (a) a SaaS business, you may only need to have $150–200m in ARR to reach a $1bn valuation, but if you (b) sell one-time products, you may need $1bn in sales to reach a $1bn valuation (assuming growth and other factors are also favorable). Calculating backwards, if you estimate capturing 1% of your target market at exit, for (a) you’d need a target market of $15–20bn, but for (b) you’d need a target market of $100bn.
- Is your target market growing meaningfully year over year?
- What are the competitive dynamics in your target market?
- What is your defensibility? Do you have significant IP or differentiation?
VII. Prioritizing self-care to win in the long-term
One of the best sessions of the program focused on self-care for founders. You can’t build a company if you are not mentally and physically in good shape. Establishing basic routines for sleeping, exercising and taking time off, along with good dietary habits, can go a long way in keeping your spirits up and maintaining your balance during the frequent lows during the entrepreneurial journey. While this concept may feel like common sense, founders often fail to prioritize self-care, thereby doing a disservice to not only themselves but also their team and all their company’s stakeholders.
Aptly titled “How to Win”, the session by Daniel Gross was cited as the best session of the entire program by many participants (if I had to recommend watching just one YC SS video, I’d recommend this one):
There were numerous other great takeaways on hiring, product design and more — but the above seven were the most meaningful for my team and me. You can watch all the 2018 Startup School session videos here: https://www.youtube.com/watch?v=rzVbFeiEbds&list=PLQ-uHSnFig5NVnJ_cLWM7dLuMQRDeekoX
The next YC Startup School program will be held in July — you can join their waitlist here: https://www.startupschool.org