Course  Startup School 2019
July 22, 2019, Mountain View, CA., USA
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Kevin Hale - How to Evaluate Startup Ideas
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About speaker

Kevin Hale
Partner at Y Combinator

Kevin Hale was the cofounder of Wufoo, which was funded by Y Combinator in 2006 and acquired by SurveyMonkey in 2011. He was responsible for Wufoo’s much-admired design and speaks widely about UX. Before Wufoo he wrote about design for Particletree and was editor in chief of the web development magazine Treehouse. He has a BA from Stetson University in Digital Arts and English.

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About the talk

Topic: Business

YC Partner Kevin Hale walks us through the process of evaluating ideas and how founders should think about their startups.


***

Topics

00:00 - Why we're starting with evaluating ideas

1:25 - YC doesn't just fund companies with traction

2:50 - How can I predict if an investor will like my idea?

5:15 - A startup idea is a hypothesis

6:55 - The problem

10:55 - The solution

12:35 - The insight

14:00 - Founder's unfair advantage

15:00 - Market growing 20% a year

15:40 - Product 10x better

16:30 - Acquisition model

17:55 - Monopoly

18:50 - Threshold belief

19:10 - Miracle belief

20:10 - Example: YC

23:20 - Example: Wufoo

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So this is how to evaluate start-up ideas and this is actually a new set of content that we've developed based on a lot of feedback that we saw from the last start of school and what we noticed as a lot of people's challenges so last year's curriculum content that ended up being when we looked at the data for who's participating in start of school was like, oh this is much more advanced as much further along a lot of people friends since like I had no idea or like I have too many ideas that they don't know which one to pursue is a main reason

why a lot of people are only able to work on their startup sometimes part-time. Yes, they might be stuck with resources, but they didn't have conviction. They didn't know like oh, what would I have that believe in order to say like, I'm going to quit my job. This is also a really great sort of skill to sort of have because if you are really think you need to pit it. How do you evaluate if you need to do that? And then also if you're reading this And I was like, how do you evaluate it? Whether something is worth going to end if you already have a launch company, then you might have

prompted likewise in this growing or how do I improve it and evaluating your startup especially in the way that sort of Adventures evaluate startups ideas. We find is going to really really useful. This is like myth about Y combinator is that people think why she only funds companies with tons and tons of traction right about now a days the only way to get the white see you have to have lots of Revenue or tons of users already and part of that has to do with like the press and then the exposure of the companies that make it the demo day. Those are

the stories you tend to hear but that being said, there's lots of great examples of companies who actually got accepted just with an idea. And so then if it's a really good classic one Parker was Single non-technical founder who pitched an idea to YC and he got in that way. We also had Reddit. So technically they were forced to pit it right away. So they hadn't written a single line of the my experience in NYC is actually exactly the same as when I founded Bluefield and we entered that second batch. We also had not ridden a single line of code P G had invested us. I

just the ideas and so I feel fully committed now as a partner to always be trying to find a dedicate time and energy to funding companies. We're just at the idea States a lot of our efforts here from working on Startup School the help us help you work on how to talk and think about your startup and that if we can fix that it can help you sort of inspire us to be like, oh, yeah, I can believe in what you're doing and a lot of times Founders get in the way when they're telling their narrative. So, how can I predict if an investor will like my idea that salt Emily or trying to

figure out and the answer is really easy. And so for us at YC, the definition of a startup is a company that is designed or created to try to grow very quickly. So if you're not trying to build a company that grows very very fast then your company and there's nothing wrong with that but these companies are the ones that investors are interested in. So if your look up me to build something that will have tons of users that will have huge valuations. I'll be able to attract that your funding then the evidence that we want is evidence that

shows that your company can grow quickly. I have a confession to make if you ever meet me or talk to me about your startup and kind of recruiting or at one of these events. I will never tell you that I do not like your idea. And there's a reason for that that is not to be nice to you as not to blow smoke up your ass. I'd learned this way of thinking from Paul Graham. He says like look the average investor or lot of investors that you see when you talk to them about your idea. It feels like they're trying to poke holes in your idea

to try to figure out what's wrong with it. And then I like trying to show them that just how smart they are and he explained that like his job in the way. He sees I work at YC is that it's not to figure out what's wrong with the company, but the figure out how it could possibly win cuz are bats the ones that when are the ones that are non obvious, right? And so for us to figure out the non-obvious stuff, it's going to not sound obvious when they first tell you and so we have to like work on our imagination. We have to work on our optimism the

figure out. What is the way that whatever story that they're telling me it could become. A billion dollar company and then a great investor pictures that back to the founder. I figure out all the ways, I think whatever he's doing could possibly become big and then I'm trying to convince you that this is what needs to happen so that I would have the evidence or that you will be on the right path to having company that grows quickly. A startup idea is basically a hypothesis and this is the way you should think about it. It's a hypothesis about why a company could grow quickly

and your job is to figure out how to construct your hypothesis basically the pitch to the investor. So they understand how it can go grow quickly. A lot of times people make the mistakes of trying to accurately describes or over describe a lot of different parts. So I'm going to break it this down. So just like a normal hypothesis has a pretty decent structure for this this will hopefully help you sort of Workshop like understanding. Oh this is exactly all the reasons why this should succeed and too even before we start even building anything we can have an

understanding of like, oh, here's the position of passive this company or here's the thing. I need to prove the show that this company could do. Well, so the first is the problem so stratified is composed of three parts. The first part is a problem and it's basically the initial conditions. You have to explain to me. Like what is the setting for this company that allows it to be able to grow quickly II is the solution. So this is basically what is the experiment that you're basically running it within those conditions for it to grow really quickly. And the third is what your

Insight to what's your explanation why the thing that you're going to try your experiment is going to end up being successful. Those are the three components are always trying to figure out when I'm listen to someone's patch. Here's a tip for talking about the problem. What did know whether your problem. Your initial conditions are correct? The person is good problems de popular so lot of people have the problem you want to avoid problems that there's a small number of people that have it. We like problems that are growing. So therefore the market

basically like is it growing at a rate that like more and more people going to be having the problem and it's it's going faster than other people's or other types of problems. We like problems that are Urgent ones that need to be solved very very quickly. We like problems that are really expensive to solve because if you're able to sort of solve it then you can charge a lot of money potentially. We like problems that are mandatory. Right? So therefore it's like people have this problem and they have to solve it. And then we like problems that are frequent ones that we were going to

encounter over and over and over again and often in a frequent time Interpol. So what you want to have is like some aspect of the problem that you're working on. At least one of them and it's ideal. If you have multiple of that you don't have to have all of them, but it's one of those things where it's like if your company isn't growing or if someone's not as excited about the problem is probably missing some of these characteristics. the last one about frequency is super important because I like problems and you'll find a lot of other YC Partners

like problems a lot that gives people a lot of opportunities to convert part of that has to do with some Theory. So BJ Fogg is a researcher at Stanford and he tosses his formula up all the time. He says basically for trying to change someone's Behavior. You have three things you need to have in place. You need to have the motivation the ability in the trigger. They need to all happen at the same time. So the motivation is like I have this problem. I need to solve where did it whatever it is. The ability is your startup molasses to trigger. What's

going to be the thing that gets them to all of a sudden realize so I need to solve it with your thing. That's a lot of companies will have like I build something but for some reason the one signing up or like you're not using it or not engaged I have no retention a lot of a times is because it's like you're hoping that they will somehow just remember on their own. But they have the problem and to start using you and often has most companies don't send enough for example email notifications or triggers or reminders or figure out ways to come back into the app or figure out ways to be back

in front of the user at the right time and you can't figure out those opportunities. It's really hard to get people to switch over to using your solution service or product. So are ideal problems are millions of users millions of people have it so I can feel like to work on consumer companies quite some investors like to focus on them. We like markets that are growing 20% a year. The problem is growing quickly. We like problem as well as people try to stop it right now immediately. We like

Brahms that just cost the time. I said billions of dollars, right or at least they all add up to some billion-dollar total addressable Market. We like Thomas with a law has changed the law has changed and regulation is put up there. And now people to solve a bunch of Palms you saw ton of Healthcare Palm Healthcare startups were born after Affordable Care. Act was passed. A lot of that had to do with like there was now all the sudden opportunity this problem that all these Hospitals and Clinics had to solve and then will I promise that people need to solve multiple times a day or

we'll use it multiple times a day bass. What's a good classic example, but people also would love to slack right because it's like a baby engaged and using it multiple times a day during the week work day. Solution so that the Supreme Court only one piece of advice. I really have for the solution. That's the best advice that you can ever follow and that is don't start here. So what I mean by that is a y c we have an acronym for problem that we try to avoid or basically an application. We have to go like oh man. I wish they had started with a problem first

and we call it s i s p s means solution in search of a problem and often what happens is like you're an engineer you're excited about technology some new technology has come on the scene. Let's say it's blockchain, right but say it's like react native or whatever. The new thing is in you like I want to build something with this. It's a large reason why you start working on a project and then you go like, okay. What's a prom dress off now? I want to use this no matter what and then you try to shoehorn a problem into the solution. And what ends up happening is

that too much more difficult way to grow the company. It's not impossible for companies to grow this way the super inefficient. It's much better to be like, let me see what problems people have and now I use whatever is necessary to solve them and therefore it's much more likely that you will grow as a result because the other way around is you might have to go and try to drum up the problem or you have to like brand to problem. That's something that people have and it's so much more difficult you end up going much more slowly as a result. So look at what your building right now or look at the

reason why you trying to do the startup and is it because you only care about the technology and building something in that or have you started with a problem you go like I'm going to do whatever it takes to solve people users customers issues. The last one's a little tricky its what is the Insight? What's the reason why this solution is going to work and this is where a lot of companies are to get tricked up because it's it's really about like what is your company's unfair Advantage Rent? Why are you going to win versus everyone else? Why are you going to be the

fastest one to sort of grow? Cuz that Insight is what's needed for the investor to choose you over anyone else. And it has to be related to growth you have an unfair advantage that explains why you're going to grow quickly. If it's not related to that then it's not it's not going to be something that investor is going to find valuable and wasps when you need one. You can't just be like I have a problem. I'm solving it and I have no explanation Why without that last sort of explanation? I can't use my imagination. I can evaluate just solely on how well you thought

through this problem. All right, and so let's go through the types of unfair advantages that your company have. So just five different types and companies do not have all of them really great ones surprising not surprising will have all of them and we'll go through two examples, but you want at least one and it's nice to get out of two or three, but for most of you is probably just one so the first one so how do you know if you have a Founder unfair advantage and to all of these will be connected to numbers actually help is make this really easy you like. Are you one

in ten of all the people in the world? Who can solve this problem? Are you super expert? And 99% of the people we find out why see do not fall into that category. And so if you think it's like well, I'm up. Product manager at Google there's a lot of product managers at Google if you say you're an engineer Microsoft is a lot of engineer at Microsoft. It's like great but it's not one that will make me think. Oh, you have a greater on a person that someone else if you've done a PhD and let's say you've done it

on some kind of crazy biotech research and you have like a special patent to be able to cure some kind of disease then you have a Founder advantage. Your Market is it growing 20% a year like by default if you just build a solution in the space, you should just automatically grow cuz you're just following a friend. If this is your only company Advantage, then it's one of the weakest ones that you can have. It is great to be in that space or you want to have something in addition to this like you're going to do like better-than-average because you picked

the right problem space and the right side of customers that want your problem. But again, if you're in a market that is stagnating or shrinking then you're going to have investors worried about the long-term viability every company as a result. Product does super simple is your product 10x better than the competition. If it is then you potentially have an unfair Advantage. It has to be very very clear. Someone should be able to look at your project and go like oh shit. This is so much better than everything else I've ever seen. It is 10x faster. It is $10 cheaper Etc. And if it's

not an order of magnitude, but I just like 2x or 3x again. That's nice, but it's not enough for an investor to go like all this is a slam dunk in regards to that 10 x product and showing that you are able to have that later in start at school going to do electron pricing and we'll talk things about cost and value and then we'll help you sort of better understand. It's like, oh how to better prove out that 10x multiple using service metrics in numbers and pricing acquisition. So a lot of people think that if you go to investor and you've done a bunch of Facebook or Twitter or goo Why

didn't you show your CAC and LTV. You were able to prove that you have a sustainable sort of acquisition model. I don't want you to know that if paid acquisition is the only way that you were able to grow your company. Then I'm going to Discount. Channel of growth great lake that is because if you actually get really popular you can actually start being someone significant. Let's say becoming a hundred billion dollar Revenue company, then you can attract a lot of competitors in the space and that Advantage is going to quickly dwindle overtime blue raven is really good example of this almost

all the Acquisitions and paid and it went to eight through that was almost nowhere else for them to sort of go you want to find acquisition paths that cost no money in my favorite companies the ones become really great are the ones that can grow by word of mouth. Is it a good percentage of the way they grow and so in the early days of a startup if you don't have any money That's actually very great way of exercising. How do I grow this without having to pay for it? And so in the beginning we tell you to do things that don't scale but this is what you started accomplished is like do I

have an advantage that is free. And the last one is you have Monopoly and so we don't mean this in the monocle Monopoly game sense. So we made it as like as your company grows. Is it more difficult for you to be defeated by competitors? Do you get stronger? And so a good examples of that are like companies with network effects and marketplaces marketplaces were tends to be a winner-takes-all one company will tend to win and network effect is just basically as my network Rose the strength

of my company and the value of the product or service also grows with it. Not every company has it when when you do have that works out great. Do something to keep in mind also at other things. I'm looking to believe about a company and that is something that trips up a lot of Founders. And so there's two types of beliefs that I have about a company until Thursday threshold belief, which is like the default just for them to even succeed so often times for me. It's like oh them building it can they even build it? They can't even build it none of it

even matters. And so to me that question is not the most important. What will determine whether I'm going to win the lotto is a miracle belief that like, oh my God, if I believe that they can do this that actually going to be able to take off are they? Well, that's a nice a really simple. So if you are heavy engineering team or doing a btb or Enterprise start up again the default as you have to build it. So if you can't even build it, then it's not even going to work. So I don't spend actually a lot of time looking at that for me. I'm trying to figure out success will be determined by

how well you can do sales how well you can tell the story how well you can actually convince customers and work through a sales process. I want evidence that shows that you know how to work through that and make that happen. And so all of my work with most of those companies is like not working on projects like hey, alright, let's prove this other thing that if you have that I'll be the thing that actually will help people go by OSHA. They have the super combo. Some quick examples. So y c is a good one because we like to think of why season

start up. So the problem The Way We Were this is It's hard for Founder's to raise money without knowing someone and venture-capital set the time. It was started. You basically had to be an inside her house. The only way you can soar to get money and that's never stopped and the solution that basically program came up with is like investing companies through an open application. You don't need to know anyone. You just tell us your idea. Tell us a bit about yourself. That should be enough for you to get funding. Now there's a bunch of unpaired bandages

that why she had number one of the founders of pretty incredible. So Paul Graham had a textbook on lisp RTM like wrote the very first worm. He's like amazing programmer and they had built and sold the first SAS company of those be a web to Yahoo. So they were kind of expert type of evaluating technology and also understanding kind of starts in that whole process. The market basically believe that future billion dollar companies will be technology companies will be powered by software and the wonderful thing about

that companies, especially at that time was more so I was making it cheaper and cheaper for software companies to be started and they said they needed a whole lot less money and he could make a lot more about that than the product. So basically, you know, They pay the founders the come for 3 months to get some advice. They work on their product for Roosevelt small amount of money. And then at the end of the time instead of working space they work from their own home and then they pitch to a bunch of different. Investors and idea was like that would be so

valuable to a potential founder who had no connection that it would attract a lot of really great mines or a lot of people who are hungry to get into the space. Acquisition realize this is like PG was able to build up YC and attract the right talent because Kitty huge reach your audience when he got started got written that textbook. Yes, but he also brought all these popular online essays and had a large audience of his Target users hackers. Tacoma to buy with this product and you can acquire them relatively cheaply just by making website and

letting it be known. And then the last one is something he didn't even realize when he started YC. And that is that as the white seal online that work crew it got more powerful and more valuable over time. The results are funded mm companies 4000 Founders did the CEOs of some the biggest companies in the world. They are over 15 companies worth a billion dollar over a billion dollars does 93 companies with over a hundred million dollars and our total market capitalization is over a hundred billion dollars. Are you one more example with you guys? So

goofy. This is my startup and it's an online form and Survey Builder answer for us. It was basically a website needs to collect some kind of data at some point, but you need to know How to code or higher programmer to be able to do it and so the solution was to build something that what they see is what they got like basically a drag-and-drop visual editor and that any non-technical person sort of create and then if we did that it would solve that sort of specific problem. So very quickly the market it's kind of ridiculous. Like we were ass in the early days calculate art and what it

was like everywhere else that needs to I don't really understand like what was that doesn't need a form eventually. I got a lot of circle really really quickly our product with easy shown to be 10x faster and against the direct competition with other builders because it was so much passion to do the dragon dropping and Visually see and then I'll usually 100 x faster than like a lot of traditional routes for very custom forms for hiring a programmer and very cheaper because we had this premium model. That also lets you an acquisition unfair advantage and so we actually had started

off with building a Blog and building an audience as well. Start off with $100,000 / subscribe to a Blog we launched at the damn building up that audience for a year and that's actually what we applied. Do I see where there's like we had built up this audience. We have proved that all these other things are like in place and then part of the other acquisition models that you can embed these forms on people's website and then our users basically spread our form and software for us as a result. We never had that hire any sales people their results are part of his youth by every

industry market and vertical you can imagine the cons of super large companies and we did this with a relatively small amount of team when we were acquired. We're weird outlier to make sure all the other Acquisitions the average company, where is only raises like 25 million dollars before an exit and this is the average return to Peru Foo. 118000 for the whole life of the company and our returns over three thousand percent. Okay, so in the end is very simple exercise with super and lightning went to actually go through it and to try to figure out that narrative in story.

So I turned it back to you go through and try to answer those questions about problem solution your unfair Advantage figure out where are my holes. Do I have one and then the question becomes? Oh, what do I need to prove? What do I need to work on to make that happen? Your startup idea is a hypothesis about why you're going to grow quickly. Brighten next lecture where to talk about the first ways. We tried to prove it out to basically test our hunches and that is by talking to users.

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