Learnings from: ‘Y Combinator: How to Start a Startup ’ — Part 2

Lectures 4–6

Lecture 4 — Building Product, Talking to Users, and Growing (Adora Cheung)

Adora’s company, Homejoy, provided crowdsourced on-demand home cleaning from 2012 to 2015. The company raised roughly $40 million over its 3 years of operation.

Adora’s Lecture

Much of Adora’s lecture is composed of stories about methods for understanding your customers. In Homejoy’s case, both the homeowners, and the cleaners, are Homejoy’s customers. Adora actively participated as both a receiver of Homejoy’s cleaning services, and as a provider of the cleaning herself.

She also speaks of an honesty curve — you don’t just want to speak to customers and get any form of feedback, you want honest feedback. There are many contributing factors towards this curve: Users give different feedback depending upon whether the product/service is paid or free is one example.

While Adora seemed to understand how to get valuable insight from her customers, her company didn’t seem to utilize this information properly — as will be see in the next section.

The other main component of her lecture is focused on rapid company growth — which ironically, was a central contributor to the downfall of the company. Interestingly, she advocates for focusing on a few valuable features for the full cycle, prior to expanding — which her company, in post-mortem, did not seem to exemplify very well.

Homejoy’s Failure

Homejoy’s official closing citation mentioned difficulty maintaining profitability as well as worker classification lawsuits.

It seems that a large contributor to Homejoy’s inability to maintain profitability was that it expanded faster than it could fill in its product gaps — users were not enjoying the product, and so their customer retention was very low.

Customers cited frequent last-minute cancellations — which Homejoy could only replace 15–20% of the time. Homejoy did not meet a critical mass of cleaners in the majority of markets it occupied to provide a reliable service.

Homejoy had expanded to 30 markets, including international, over its brief 3 years. It grew from 20 to 100+ employees in roughly two years. All this growth occurred while customer retention remained low. Further, while the company expanded markets, and corporate employees, it actually reduced its customer service spending.

Homejoy was able to keep a high user count, perhaps in large part due to very generous first-cleaning discounts… a form of inorganic growth. Their expansion increased the load on their inorganic growth costs, further increasing their burn rate.

Why?

Adora seemed to understand and voice the properties of a good startup which her company lacked in this lecture — Yet was unable to bring them into practice.

Why this happened can’t be known for sure, but one contributor is likely how focused Homejoy’s leadership became on defeating their competition. Homejoy had a strong competitor, ‘Handy’, which had a very similar business model.

Handy expanded their market slower, paid their cleaners more, and overall had a slower burn rate than Homejoy. Handy eventually sold to to ANGI for ~$164 million in 2018.

As mentioned by Altman in lecture 2, and the focus of the next lecture with Peter Thiel, paying too much attention to competitors can remove you from what should be your main focus: Building a product that users love via repeated building and feedback retrieval.

For more insight to why Homejoy failed, I recommend this article: https://www.wired.com/2015/10/why-homejoy-failed/

Lecture 5 — Competition is for Losers (Peter Thiel)

In short: aim for monopoly.

Capturing value

“A business creates X dollars of value, and captures Y% of X. X and Y are independent variables”

Startup profit is not just based on creating value — in fact, Thiel argues that capturing value is perhaps more important. Innovation does not earn money itself, monetization of innovation does.

In order to capture large amounts of value, the nature and size of the market you are in matters dramatically. Thiel uses the example of google having a larger market cap than all US airline carrier combined, despite having lower revenue, because it has a much higher profit margin. Thiel argues that because Google has a monopoly, it is able to control both variables in the business equation.

If you build a monopoly in a tiny market with no room for expansion, that may be worse than a non-monopoly in a medium/large market.

“The Stanford of North Dakota, is not Stanford.”

Building and keeping a monopoly

Thiel recommends starting small, and not expanding until monopoly is achieved. While innovation is valuable to achieving a monopoly, if the market is too volatile, obtaining a controlling grasp on state of the art may be too difficult.

In contrast to prior speakers in this series, he thinks growth is overvalued, and durability is undervalued:

He emphasizes that a momentary monopoly is useless — the monopoly must be durable. While getting to monopoly in a newly discovered market is often viewed as a race, Thiel seems to emphasize the idea that the race never ends.

While he acknowledges that achieving a monopoly is hard, and that the race never ends, also he notes that keeping a monopoly, once scaled, has innate advantages such as last mover advantage (can absorb newcomers), network effects, economies of scale, vertical integration, branding, etc.

Lecture 6 — Growth (Alex Schultz)

Schultz, now Chief Marketing Officer and VP of Analytics for Meta, then VP of Growth at Facebook, digs into what the organic movers of growth actually are.

Retention drives long term growth

He states that retention, in majority of cases, will be #1. For platforms which require user or activity saturation, such as social media, you cannot rely on influx of users providing this saturation.

Platforms such as e-commerce, can maybe get away with lower retention rates, but it will be valuable nonetheless. You want consistent usage, not unpredictable spikes in users, followed by rapid abandonment.

Growth is a result of the whole company, not just marketers, not just product

Alex articulates the idea that the whole company needs to be educated on how growth will be achieved. The timing of goals is important. As seen with Homejoy, market expansion seemed to outpace product refinement.

If the marketing team burns heavy amounts and obtains high numbers of new customers, but the product team is not ready to provide a quality experience, that is an inefficiency.

Conversely, Alex also notes that the “build it and they will come” quote, is not reliable — if the product is built out well, but the rate of new users is low, the startup can lose momentum. Further, if the product is not tested by enough new users at a rapid rate, the product team may not have enough feedback to continue improving the product at a high velocity.

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