Last year experience at startup school showed Y Combinator that last year curriculum was too advanced. Most of the people participating in last year startup school have no idea or have a lot of ideas and they don’t know which one to pursue.
One of the reasons many people can only work part-time on their startups is that they don’t know what do they need to be convinced to quit their jobs. Also, this is a critical skill for startups to know when to pivot. Evaluating your startup ideas tells you when to pivot, and what to pivot for that worth doing. Also if you are launched evaluating your ideas, tells you why you are not growing and how to improve.
It is very useful to evaluate your startup idea as an investor evaluates it. Many founder wondering if the investors gonna like their startups or not. Kevin Hale explains how you can predict if investor like your idea or not.
How can I predict if an investor will like my idea?
In YC startup definition is basically “Growth”. A startup at YC is a company that is designed to grow very quickly. Otherwise, you are creating a normal company, which is nothing wrong with that. But YC and mostly any investors are not going to like that. So, If you want to attract venture fundings, you need to show evidence of growth.
Kevin made a confession during this presentation, that if you meet him, he never tells you he did not like your idea. Not being nice, but he found their job not to look smart and find what is wrong with your idea. But to find how it could possibly win. Because the ones that are going to win looks non-obvious, they are not obviously going to win, and the job is to find the non-obvious.
Your startup idea is a hypothesis
It’s a hypothesis about why a company could grow quickly. You need to construct your hypothesis. Basically, that is your pitch, do not put so much confusing data. As a good hypothesis has a decent structure, your startup idea also needs to have a good structure. Kevin Hale breaks it into three parts.
- Problem: Basically, it’s the initial condition that allows the startup to grow quickly
- Solution: The experiments that you’re running, within those conditions, for it to grow really quickly?
- Insight: Your explanation that shows why the thing that you are going to try, your solution, is going to end up successful
A good problem worth working on has 6 main characteristics:
- Popular: good problems are popular
- Growing: more and more people going to have this problem
- Urgent: problems that need to be solved very very quickly
- Expensive: so you can charge a lot of money
- Mandatory: so they need to solve it, it is not going anywhere without a solution
- Frequent: people going to encounter it again and again
Some part of the problems you are working on need to have some of these aspects. No need to have all of them, but ideally multiple of them.
If your company isn’t growing, or people don’t like what you are building, it’s probably you are missing some of these characteristics.
The last one about frequency is very important. The reason is, YC and other investors like problems that give people a lot of opportunities to convert.
If you want users to use your solutions frequently, you need to understand that users behavior is a combination of Motivation, Ability, and Trigger
Motivation is the problem mostly, and the ability is your startup. A lot of companies build something and they say no one is signing up or there is no retention. You are hoping they somehow remember that they can solve their problems with your solution. Some companies don’t send enough notifications or emails to trigger users to use their apps.
So to know what is a good problem that worth creating a solution for, Kevin describes an ideal problem:
- 1M users: a problem of 1 million users is a really good problem
- Market growing 20%/year: if you are working on a space solution, you are growing automatically by default, because you are following a trend. If this is your only advantage, it is one of the weakest ones. Because you relate your company success to market growth or shrinking, so you need something else in addition to this.
- Urgent problems: problems that are needed to be solved right now
- Problems that cost money: so you can charge a lot of people
- problems related to the law changes
- Hourly problems: problems that people needed to solve multiple times a day
One piece of advice: DO NOT START HERE.
Do not build something and then look for a problem to solve that with your solution.
It often happens, you are excited about technology, like block-chain, react native, etc, and you say I wanna build something with this, I wanna use this, what problem could I solve with this, I wanna use this no matter what. It’s not impossible for companies to grow like this, but it’s super non-efficient.
At YC we have an acronym for the problems we try to avoid:
SISP: solution in search of a problem
Look at what you are building, the reason you are starting a startup. Are you just excited about some technology, or you have started with a problem?
You need to explain the reason that your solution is going to work.
You need to have an unfair advantage, in order to explain why are you going to win versus everyone else.
Your explanation should be related to growth. You need an unfair advantage that explains why you are going to grow quickly.
And remember, you need one. You can’t just have a problem that you are working on. you need to explain why your solution is going to work.
There are multiple types of unfair advantages. You need at least one of these:
- Founders: Are you 1 out of 10 who can solve this problem? As Kevin says, 99% of people they find at YC do not fall in this category. A product manager at Google is great but that is not enough, there is a lot of product manager at Google. If you have a Ph.D., in crazy biotech research and you have like a special patent to be able to cure some kind of disease then you have a founders advantage.
- Market: Is it growing 20 percent a year. If you are following a trend, like you are building a solution in the space, you just automatically grow. If this is the only company advantage, then it is the weakest one that you have.
- Product: Is it 10X better than any competitor. Being 2x or 3x better is great but it is not enough for investors.
- Acquisition: If your growth depends on money like you grow when you use google ads, you can’t be very competitive as you grow. Because you will attract many competitors as you become, let’s say, a 100 million revenue company. And your advantage is going to quickly dwindle over time. the best companies grow by the word of mouth. If you don’t have money when you start a business, it’s a good exercise of the ways that you can grow your business without paying for it.
- Monopoly: As your company grows, is it difficult for competitors to defeat you? are you getting stronger? Good examples of that are like companies with network effects and marketplaces. In marketplaces where it tends to be a ‘winner takes all’, one company will tend to win. If you have network effects, as your network grows, the strength of your company and the value of the product or service also grows with it.
There are two major beliefs facing a startup:
- Threshold belief
- Miracle belief
The threshold belief, which is like, “What’s the default just for them to even succeed?” for Kevin Hale, it’s like, “Oh, them building it, can they even build it?” That’s a threshold belief. If they can’t even build it, none of it even matters. Kevin believes this question is not the most important. What is the most important which determines if you are going to win, is miracle belief. So if you are a heavy engineering team or doing a B2B or enterprise startup, again the default is you have to build it. If you can’t even build it, then it’s not even going to work, so Kevin is telling us, he does not spend actually a lot of time looking at that. Instead, in Kevin’s opinion, 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. Kevin looks for evidence that shows that you know have to work through that and make that happen. And so, all of Kevin’s work with most of those companies is like not working on the product, it’s like, “Hey, all right, let’s prove this other thing.” That if you have that, that’ll be the thing that actually will help people go like, “Oh, they have this super combo.”
So, If you are going to talk to investors, focus on evidence that proves you can tell a good story about how you can solve customers problem and how you can convince them to use your solution. Again, don’t focus on your product and how you are going to build it. That is just the default.
It is very useful to see how an investor looks in your startup. Not only it helps you to evaluate your idea in a better way, but it also helps you to build a pitch deck that your investor wants to hear. Then you can construct a hypothesis that makes sense.
Here you can watch Kevin Hale’s full talk at Y Combinator Startup School.
Thank you, Kevin, for your good advice about how to evaluate our ideas.
How do you evaluate your startup ideas? Comment any other books, or talks that will help people in startups to evaluate their ideas.