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Kevin Hale - How to Evaluate Startup Ideas
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About the talk

YC Partner Kevin Hale walks us through the process of evaluating ideas and how founders should think about their startups. Startup School is YC's free online program for founders. Sign up to access the full curriculum and over $100k in deals! https://www.startupschool.org/

Transcript and lecture slides here: https://www.ycombinator.com/library/6e-how-to-evaluate-startup-ideas

This lecture is part of YC's Startup School, a free online program and global community of founders. Register and join the community at https://www.startupschool.org/

***

Topics

0.00 - 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

01:25 YC doesn't just fund companies with traction

02:50 How can I predict if an investor will like my idea?

05:15 The startup idea is a hypothesis

06:55 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

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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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 has a lot of people's challenges that ended up being cool 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 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 start up sometimes part-time. Yes, they might be stuck with resources, but they didn't have conviction. They didn't

know like, oh, but 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 bigger than the Sun And I was like, how do you evaluate it? Whether something is worth going to. And if you were to have a laundry company, then you might have problems with 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 a really, really useful. This is like meth about Y combinator, is that people think why she only funds companies with tons and tons of traction right about now? Adays. The only way to get to weissensee, 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 have 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 y c 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. The one I found a blue Foo and we enter 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. That is a lot of our efforts here from working on. Start at school. The help us. Help you were gone 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. Well, by the time Sounders, get in the way when they're telling their narrative. So, how can I project if an investor will like my idea that ultimately 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 you just put ink in a company, small business, and there's nothing wrong with that, but these companies are the ones that investors are interested in. So if you're looking to build something that will have tons of users, that will have huge valuations. I'll be able to attract better funding than 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, but it's not to blow smoke up your ass. I 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 kind of poke holes in your idea for trying to figure out what's wrong with it. And then I try 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 our bets the ones that went or 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 agreed 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 for that. You will be on the right path to having company that grows quickly. A startup idea is basically a hypothesis and it's 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 basic of 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 the breaking 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. All this is exactly all the reasons why this should succeed. Even, before we start even building anything we can have an understanding of like, oh, here's this, is our path of this company or give me the thing. I need to prove the show that this company could do. Well, so the first is the problem to start a

body is composed of three parts. The first part is a problem and it's basically the initial conditions. Yet explain to me. Like, what is the setting for this company that allows it to be able to grow quickly. The second is the solution. So this is basically what is the experiment that you're basically running? But in those conditions for it to grow really quickly and the third is what your insights, 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 problem, the 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 stopped 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 people going to encounter over and over and over again and often in a frequent time in the bowl. So would 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. 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 icy Partners like problems. A lot that gives people a lot of opportunities to convert a part of that has to do with something. So BJ. Fogg is a researcher at Stanford and he tosses his formula of 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, and the trigger. And 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. The last is the trigger. What's going to be the thing that gets them to all of a sudden realize? Oh, I need to solve it with your thing. That's a lot of companies will have like, oh I build something but for some reason no one signing up or like they're not using it and they're not engaged. I have no

retention. And a lot of times is because it's like you're hoping that he was 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 out 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 our ideal problems are

millions of users, right? Millions of people have it. So I people like to work on consumer companies, swipe some investors like the focus on them. We like markets that are growing 20% a year. The problem is growing quickly. We like problem, as well as people trying to stop at right now. Immediately. We like bums that just cost a time. I said billions of dollars, right? Or at least they all add up to some billion dollar total addressable Market. We like Thomas where the law has changed. The law has changed and regulation is put up there. And now people to solve a bunch of Palms. You saw one 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 when I promise that people need to stop multiple times a day, or will use it multiple times a day. They took the classic example, but people also be a lot of slack, right? Because it's going to be engaged and using it multiple times a day during the week work day. Solution. So, they're just pretty much. 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 ycb 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 the problem. First. We call it s. I s p. B 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, if 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. Whatever. I'm going to self 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 do people have and then I will 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-new 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 ones a little tricky. It's what is the inside of why this solution is going to work. And this is where a lot of companies are to get tricked up. Because it's really about like what is your company's unfair Advantage? Right? 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 out. Unless 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't evaluate just solely on how well you thought through this problem. Right, and so, let's go through the types of unfair advantages that your company have. So, just buy different types and companies do not have all of them, really great ones, surprising not surprising, will have all of them and will 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, which will help is make this really easy. It's like, are you one and 10 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 do you think it's like, well, I'm a

Product manager at Google. There's a lot of product managers at Google. If you say, you're an engineer Microsoft Microsoft. It's like great, but it's not one that will make me think. Oh, you have a greater on if they're being sent to 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 found her advantage. Your Market is it growing 20% a year like by default if you just build the solution

in the space, you should just automatically grow cuz you're just following a trend. 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. But 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 set 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 of a company as a result.

Product 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 10x, cheaper, Etc. And if it's not an order of magnitude, but it's 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 10x product and showing that you are able to

have that later in start of school going to do electron pricing and we'll talk things about cost and value and then we'll help you. So, to better understand as I do, how to better prove out, that 10x multiple using set of 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 don't you show your cock and L TV. 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 greatly. That is because if you actually get really popular, you can actually start being someone significant. Let's say becoming a hundred million dollar Revenue company, then a lot of competitors in the space and that Advantage is going to quickly dwindle over time has really good example of this acquisition and paid and it went to a through that there's almost nowhere else for them to sort of go. You want to find acquisition pants that cost no money and my favorite companies. The ones that could become really great or 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 start-up, 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 sort of accomplished. It's 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 comedies 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, 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, as 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 there's the threshold belief, which is like the default just for them to even succeed. So often times from me. It's like, oh them building it. Can they even built it if 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 for a while. Its allies are really simple. So if you are heavy engineering team or doing a b TV 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, let's prove this other thing that if you have that, I will be the thing that actually will help people go like, oh shit. They have the super combo. Some quick examples. So, why see? Is it good one? Because we like to think of myself as a start-up. So, the problem, the way Woodward. This is It's hard for Founders to raise money without knowing someone and venture-capital set. The time. It was started. You basically had to be an Insider. I was the only way you can sort

of get money and that's a hot. And the solution. Basically pug and came up with is like, invest in companies doing 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 a advantages that why she had never won the founders of pretty incredible. So, Paul Graham had wrote a textbook on this ship are Tia and like wrote the very first worm. You look amazing programmer and they had built and sold the first SAS company

of those, be a web to Yahoo. So they kind of expert that be 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 to be powered by software and the wonderful thing about tech companies, especially at that time, was more. So, I was making a cheaper and cheaper for supper companies to be started and they said they needed a whole lot less money and he could make a lot more bats as a result, the product. So basically, No.

They pay the founders, the come for 3 months, to get some advice. They work on their product, Four Roses, 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 the 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 minds, or lot of people who are hungry to get into the space. Acquisition realize. This is like PG was able to put A build-up ycee and attract the right talent

because hit a huge reach your audience. When he got started. He had written that textbook. Yes, but he also brought all these popular online essays and a large audience of his Target users hackers. Tacoma die with his product and you can acquire them relatively cheaply just by making website and letting it be known. I'm in the last one is something he didn't even realize when he started y c. And that is that as the YC Alumni network crew. They got more powerful and more valuable overtime. The results are funny. 2000 company's

Founders did the CEOs of some of the biggest companies in the world. They are over 15. Companies worth a billion dollars over billion dollars does 93 Cummins 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 we feel. This is my start up and it's an online form and Survey Builder and two for us. It was basically, a website needs to collect some kind of data at some point, but you need to know. I towed 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. David quickly the market it's kind of ridiculous. Like we were ass in the early days calculate or Tambo. It was like everywhere else that needs if I don't really understand like what was that doesn't need a form of a little icicle, really, really quickly. Our product was 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 usually 100x 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 led to an acquisition, unfair advantage. And so we actually had started off with building a block and building an audience as well. Start off with 100,000 developer, subscribe to our 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 any sales people. Their results are Prada bags used 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 were weird outlier compared to all the other Acquisitions, the average company, where is only raises like 25 million dollars before an exit. And this is

the average return a woohoo. 118000 for the whole life of the company and our returns are over three thousand percent. Okay, so in the end is very simple exercise with super and lightning went to actually go through it and try to figure out that narrative and story. So, I turn 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 do? 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. Brendan Fletcher would have talked 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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