We spend a lot of time advising startups. Though one-on-one advice will always be crucial, we thought it might help us scale Y Combinator if we could distill the most generalizable parts of this advice into a sort of playbook we could give YC and YC Fellowship companies.
Then we thought we should just give it to everyone.
This is meant for people new to the world of startups. Most of this will not be new to people who have read a lot of what YC partners have written—the goal is to get it into one place.
There may be a part II on how to scale a startup later—this mostly covers how to start one.
Your goal as a startup is to make something users love. If you do that, then you have to figure out how to get a lot more users. But this first part is critical—think about the really successful companies of today. They all started with a product that their early users loved so much they told other people about it. If you fail to do this, you will fail. If you deceive yourself and think your users love your product when they don’t, you will still fail.
The startup graveyard is littered with people who thought they could skip this step.
It’s much better to first make a product a small number of users love than a product that a large number of users like. Even though the total amount of positive feeling is the same, it’s much easier to get more users than to go from like to love.
A word of warning about choosing to start a startup: It sucks! One of the most consistent pieces of feedback we get from YC founders is it’s harder than they could have ever imagined, because they didn’t have a framework for the sort of work and intensity a startup entails. Joining an early-stage startup that’s on a rocketship trajectory is usually a much better financial deal.
On the other hand, starting a startup is not in fact very risky to your career—if you’re really good at technology, there will be job opportunities if you fail. Most people are very bad at evaluating risk. I personally think the riskier option is having an idea or project you’re really passionate about and working at a safe, easy, unfulfilling job instead.
To have a successful startup, you need: a great idea (including a great market), a great team, a great product, and great execution.
One of the first things we ask YC companies is what they’re building and why.
We look for clear, concise answers here. This is both to evaluate you as a founder and the idea itself. It’s important to be able to think and communicate clearly as a founder—you’ll need it for recruiting, raising money, selling, etc. Ideas in general need to be clear to spread, and complex ideas are almost always a sign of muddled thinking or a made up problem. If the idea does not really excite at least some people the first time they hear it, that’s bad.
Another thing we ask is who desperately needs the product.
In the best case, you yourself are the target user. In the second best case, you understand the target user extremely well.
If a company already has users, we ask how many and how fast that number is growing. We try to figure out why it’s not growing faster, and we especially try to figure out if users really love the product. Usually this means they’re telling their friends to use the product without prompting from the company. We also ask if the company is generating revenue, and if not, why not.
If the company doesn’t yet have users, we try to figure out the minimum thing to build first to test the hypothesis—i.e., if we work backwards from the perfect experience, we try to figure out what kernel to start with.
The way to test an idea is to either launch it and see what happens or try to sell it (e.g. try to get a letter of intent before you write a line of code.) The former works better for consumer ideas (users may tell you they will use it, but in practice it won’t cut through the clutter) and the latter works better for enterprise ideas (if a company tells you they will buy something, then go build it.) Specifically, if you are an enterprise company, one of the first questions we’ll ask you is if you have a letter of intent from a customer saying they’ll buy what you’re building. For most biotech and hard tech companies, the way to test an idea is to first talk to potential customers and then figure out the smallest subset of the technology you can build first.
It’s important to let your idea evolve as you get feedback from users. And it’s critical you understand your users really well—you need this to evaluate an idea, build a great product, and build a great company.
As mentioned earlier, startups are really hard. They take a very long time, and consistent intense effort. The founders and employees need to have a shared sense of mission to sustain them. So we ask why founders want to start this particular company.
We also ask how the company will one day be a monopoly. There are a lot of different terms for this, but we use Peter Thiel’s. Obviously, we don’t want your company to behave in an unethical way against competitors. Instead, we’re looking for businesses that get more powerful with scale and that are difficult to copy.
Finally, we ask about the market. We ask how big it is today, how fast it’s growing, and why it’s going to be big in ten years. We try to understand why the market is going to grow quickly, and why it’s a good market for a startup to go after. We like it when major technological shifts are just starting that most people haven’t realized yet—big companies are bad at addressing those. And somewhat counterintuitively, the best answer is going after a large part of a small market.
A few other thoughts on ideas:
We greatly prefer something new to something derivative. Most really big companies start with something fundamentally new (one acceptable definition of new is 10x better.) If there are ten other companies starting at the same time with the same plan, and it sounds a whole lot like something that already exists, we are skeptical.
One important counterintuitive reason for this is that it’s easier to do something new and hard than something derivative and easy. People will want to help you and join you if it’s the former; they will not if it’s the latter.
The best ideas sound bad but are in fact good. So you don’t need to be too secretive with your idea—if it’s actually a good idea, it likely won’t sound like it’s worth stealing. Even if it does sound like it’s worth stealing, there are at least a thousand times more people that have good ideas than people who are willing to do the kind of work it takes to turn a great idea into a great company. And if you tell people what you’re doing, they might help.
Speaking of telling people your idea—while it’s important the idea really excites some people the first time they hear it, almost everyone is going to tell you that your idea sucks. Maybe they are right. Maybe they are not good at evaluating startups, or maybe they are just jealous. Whatever the reason is, it will happen a lot, it will hurt, and even if you think you’re not going to be affected by it, you still will be. The faster you can develop self-belief and not get dragged down too much by haters, the better off you’ll be. No matter how successful you are, the haters will never go away.
What if you don’t have an idea but want to start a startup? Maybe you shouldn’t. It’s so much better if the idea comes first and the startup is the way to get the idea out into the world.
We once tried an experiment where we funded a bunch of promising founding teams with no ideas in the hopes they would land on a promising idea after we funded them.
All of them failed. I think part of the problem is that good founders tend to have lots of good ideas (too many, usually). But an even bigger problem is that once you have a startup you have to hurry to come up with an idea, and because it’s already an official company the idea can’t be too crazy. You end up with plausible sounding but derivative ideas. This is the danger of pivots.
So it’s better not to try too actively to force yourself to come up with startup ideas. Instead, learn about a lot of different things. Practice noticing problems, things that seem inefficient, and major technological shifts. Work on projects you find interesting. Go out of your way to hang around smart, interesting people. At some point, ideas will emerge.
Mediocre teams do not build great companies. One of the things we look at the most is the strength of the founders. When I used to do later-stage investing, I looked equally hard at the strength of the employees the founders hired.
What makes a great founder? The most important characteristics are ones like unstoppability, determination, formidability, and resourcefulness. Intelligence and passion also rank very highly. These are all much more important than experience and certainly “expertise with language X and framework Y”.
We have noticed the most successful founders are the sort of people who are low-stress to work with because you feel “he or she will get it done, no matter what it is.” Sometimes you can succeed through sheer force of will.
Good founders have a number of seemingly contradictory traits. One important example is rigidity and flexibility. You want to have strong beliefs about the core of the company and its mission, but still be very flexible and willing to learn new things when it comes to almost everything else.
The best founders are unusually responsive. This is an indicator of decisiveness, focus, intensity, and the ability to get things done.
Founders that are hard to talk to are almost always bad. Communication is a very important skill for founders—in fact, I think this is the most important rarely-discussed founder skill.
Tech startups need at least one founder who can build the company’s product or service, and at least one founder who is (or can become) good at sales and talking to users. This can be the same person.
Consider these criteria when you’re choosing a cofounder—it’s one of the most important decisions you’ll make, and it’s often done fairly randomly. You want someone you know well, not someone you just met at a cofounder dating thing. You can evaluate anyone you might work with better with more data, and you really don’t want to get this one wrong. Also, at some point, the expected value of the startup is likely to dip below the X axis. If you have a pre-existing relationship with your cofounders, none of you will want to let the other down and you’ll keep going. Cofounder breakups are one of the leading causes of death for early startups, and we see them happen very, very frequently in cases where the founders met for the express purpose of starting the company.
The best case, by far, is to have a good cofounder. The next best is to be a solo founder. The worse case, by far, is to have a bad cofounder. If things are not working out, you should part ways quickly.
A quick note on equity: the conversation about the equity split does not get easier with time—it’s better to set it early on. Nearly equal is best, though perhaps in the case of two founders it’s best to have one person with one extra share to prevent deadlocks when the cofounders have a fallout.