Purpose: To help individuals assess whether they are suited to become startup founders and how to prepare for that journey.
Audience: Individuals uncertain about starting a startup today but interested in exploring that possibility in the future.
Common stereotypes of founders (e.g., brilliant programmers, charismatic product geniuses) do not encompass all successful founders.
Diversity in founder backgrounds reveals that resilience has a higher correlation with success than traditional success signals (e.g., academic or career achievements).
Resilience is the most important trait for startup founders.
Founders must endure rejection and not take it personally.
Example: Sagi, founder of Benchling, demonstrated resilience despite initial struggles and now leads a valuation of over six billion dollars.
Confidence is not a reliable indicator of resilience.
Some of the most successful founders may appear quiet or less confident initially.
Reflect on your ability to handle setbacks and challenges.
Initial motivations can vary; it is acceptable to start a company for financial gain or curiosity.
Motivation may change as you progress, making it essential to have enduring motivations:
Genuine interest in solving a problem.
Passion for working with a team.
Understand what you have to lose by starting a startup:
Consider personal financial stability and job opportunities.
Being honest with yourself about what you can tolerate is crucial.
Recognize the valuable learning experience gained from the startup process.
Example of skills learned: sales, product development, and customer support.
Ideas and co-founders typically develop simultaneously; collaboration is beneficial.
Engage in conversations with like-minded individuals to brainstorm ideas.
Identify a problem or need and consider how you could address it.
Experiment with small projects to refine your ideas and skills.
Aim to build something even if it is a rough prototype to gain experience.
If you lack programming skills, consider learning to code or teaming up with a technical co-founder.
Aim to develop the minimum viable product (MVP) of your ideas.
Focus less on the success of side projects and more on your enjoyment and learning.
If your job feels draining while your side projects energize you, that’s a sign to consider full commitment to your startup ideas.
Seek passionate feedback rather than focusing solely on numbers for validation.
Don’t overthink your initial motivations; they can evolve.
Be sure you can handle the worst-case scenario of starting a startup.
Find smart people to collaborate with and explore ideas together.
Launch side projects for experience and enjoyment.
If you find a motivated and enjoyable collaborator, consider taking the leap into entrepreneurship.
This guide aims to provide conceptual tools for generating and evaluating startup ideas. Key insights stem from analyzing top companies and common founder mistakes..
Building Solutions Without Problems (Solution in Search of Problem - CSP):
Founders often start with a cool technology (e.g., AI) without identifying a real problem.
It is essential to focus on solving real problems that users encounter.
Stuck on Tar Pit Ideas:
Tar pit ideas are superficially plausible but structurally challenging.
Example: Inefficient plans for meeting friends. This has been attempted many times but remains unsolved due to underlying complexities.
Jumping to First Ideas without Evaluation:
Founders often jump at the first idea without assessing its market potential.
A balanced approach is needed; neither impulsively selecting the first idea nor waiting for the perfect idea is advisable.
To assess the quality of a startup idea, consider the following 10 questions:
Do you have founder-market fit?
Are you or your team the right people to work on this idea?
Example: The team behind PlanGrid had relevant construction experience.
How big is the market?
Ideally target a market that is currently large or rapidly growing.
Example: Coinbase entering the Bitcoin market in its early days.
How acute is the problem?
Assess whether the problem is significant.
Example: Brex provided credit cards to startups, addressing a previously unmet need.
Do you have competition?
Competition can indicate a valid market, but one must analyze the landscape thoroughly.
Do you personally want this?
Personal investment in the idea can be crucial; validate if others share this sentiment.
Has something recently become possible or necessary?
Rapid changes in technology or market demands can create opportunities.
Example: Checker enabling background checks via APIs in the wake of gig economy expansion.
What are good proxies?
Identify successful companies addressing similar problems as a benchmark for feasibility.
Example: Rapid adapting food delivery from known models in Latin America.
Is it scalable?
Software is generally scalable, but service-based models may face limitations.
Is it a good idea space?
Certain classes of ideas yield higher success rates than others (e.g., fintech vs. social networks).
What is the uniqueness of your insight?
Insight leads to differentiation from existing solutions in a competitive landscape.
There are several effective strategies to develop startup ideas:
Leverage Team Expertise:
Generate ideas aligned with the team’s existing skills and experiences.
Identify Problems from Personal Experience:
Look for issues you’ve encountered personally that need solving.
Wishful Thinking:
Consider tools or services you wish existed. Be cautious of superficial ideas.
Recent Changes in the World:
Observe recent societal or technological changes for new opportunities. Example: COVID-19 catalyzing demand for online interaction tools.
Explore Successful Companies for Variants:
Find inspiration in the models of recent successful startups and adapt them to new contexts.
Direct Conversations:
Engage with potential users to understand their pain points and needs.
Analyze Broken Industries:
Seek out industries that appear outdated or inefficient and consider how they can be improved.
Find a Co-founder with Ideas:
Joining forces with someone who has a strong concept can expedite the launch of your startup.
Ultimately, while frameworks and recipes can help generate and evaluate startup ideas, the true test of a startup’s promise lies in launching it. Execution is often more critical than the idea itself, and many startups evolve significantly post-launch.
Co-founders are essential for startup success.
A co-founder is defined as someone who helps start the company, typically holding at least 10% equity.
Reasons to have a co-founder:
Increased productivity (2x or 3x faster operations).
Higher quality brainstorming and idea testing.
Better accountability and motivation through mutual support.
Of YC’s top 100 companies, only 4 were founded by solo founders.
Start with people you know: friends, classmates, colleagues.
Explore YC’s co-founder matching platform:
Fill out a profile detailing your skills, availability, and industry interests.
Use the platform’s speed dating feature to connect with potential co-founders.
Consider the following aspects:
Goals and Values: Align on motivation and stress management.
Communication: Ability to have honest discussions.
Finances: Understand each other’s financial needs and timelines.
Commitment: Clarify how much time each can dedicate.
Meet in person (if possible) to strengthen the relationship.
Conduct trial projects to test working dynamics.
General advice: Split equity equally among co-founders.
$$\text{Equity Share} = \frac{1}{\text{Number of Founders}}$$
Common bad reasons for unequal equity:
Idea origination.
Pre-existing work done.
Perceived experience or age differences.
Clear and open communication is vital.
Establish regular one-on-ones for updates and feedback.
Avoid personal attacks during discussions.
Create an environment that normalizes failure; learn from mistakes together.
Decision-making structures:
Assign roles and responsibilities clearly.
Designate a decision-maker to avoid gridlock.
Example strategies:
Agree on a timeline for achieving project milestones.
Evaluate and reflect on significant decisions and outcomes.
Trust should be the default mode: assume positive intention until proven otherwise.
Establish psychological safety where fellows can make mistakes without fear of retribution.
Know each other’s stress responses and communication styles.
Regularly check in on one another’s mental health and well-being.
Focus on compatibility and complementary skills.
Engage in challenging yet constructive conversations from the start.
Always keep the ultimate goal of startup success in mind and support each other through the journey.
Importance of continuous communication with users throughout the lifetime of a company.
Understanding that successful startup ideas come from user feedback rather than isolated brainstorming.
Users and customers provide honest and valuable feedback.
Continuous user engagement helps maintain alignment with market needs.
Case Study: Brian Chesky’s experience living in 50 different Airbnbs to gather direct feedback.
Reach out beyond your personal and professional networks.
Utilize platforms like LinkedIn, Reddit, Discord, and attend industry events.
Personalize your approach based on your connection (known vs. unknown users).
Sample outreach structure:
Introduction of yourself and your background.
Briefly describe your project.
Request a short (20-minute) phone or video call.
Prefer video or phone calls for deeper engagement.
Establish rapport to encourage openness.
Avoid introducing your product early; focus on the user’s problems.
Listen actively, allow users to express their thoughts.
Open-ended Questions:
"Tell me how you do X today?"
"What is the hardest part about doing X?"
"Why is X important for your company?"
Aim for depth and clarity in responses.
Will you use our product?
Which features would make product X better?
Yes or no questions—focus on obtaining detailed insights instead.
Organize feedback into buckets of issues.
Write down key learnings and hypothesize potential solutions.
Design a Minimum Viable Product (MVP) based on accurate information.
Show the MVP to users for feedback.
Observe user interactions without leading them.
Encourage users to voice their thoughts during testing.
Create a dedicated communication channel (e.g., Slack, WhatsApp) for ongoing feedback.
Foster a community feel to encourage users to share insights and feel valued.
Engaging users is critical at every stage of a startup.
Applying user feedback effectively can lead to valuable products and services.
In this document, we will explore business models and pricing strategies essential for startups. We will cover:
The nine business models of nearly every billion-dollar company.
Lessons from the Y Combinator Top 100 Companies list.
Startup pricing insights gained from thousands of companies that have gone through Y Combinator.
A business model defines how a company generates revenue. Proven business models are instrumental in attracting investment and fostering growth.
The following models are prevalent among billion-dollar companies:
Software as a Service (SaaS): Cloud-based subscription services where customers pay monthly or annually.
Transactional (e.g., fintech): Businesses that facilitate transactions and take a percentage cut.
Marketplaces: Platforms that connect buyers and sellers, often referred to as two-sided marketplaces.
Hard Tech: Companies developing complex technology products.
Usage-Based: Pricing depends on customers’ usage of the service.
Enterprise: Focused on selling to large companies.
Advertising: Revenue generated from advertising.
E-commerce: Selling products online.
Bio: Biotech and life sciences companies.
The Y Combinator Top 100 list comprises companies with the highest valuations. The breakdown shows that:
SaaS businesses make up 31% (31 companies).
Transactional businesses represent 22% (22 companies).
Marketplaces constitute 14% (14 companies).
Together, these three business models account for 67% of the top 100.
A significant observation is that 50% of the total value of the top 100 companies originates from just 10 companies.
The top companies include:
Marketplaces: Airbnb, Instacart, DoorDash, OpenSea, and Faire.
Transaction-Based: Stripe, Coinbase, and Brex.
Marketplaces tend to become winner-takes-all due to network effects, while transactional businesses thrive by being at the core of money flow.
Pricing should be used as a strategic tool for learning and growth:
You Should Charge: Charging for your product tests the market for value acceptance and customer willingness to pay.
Price on Value, Not Cost: Focus on the perceived value customers see in your product rather than only the costs involved.
Most Startups Undercharge: Many startups do not realize the potential value they can extract from customers.
Pricing Isn’t Permanent: Pricing can and should be adjusted as you learn more and develop your product.
Keep It Simple: Avoid complex pricing strategies that could deter potential customers.
One compelling case is Stripe, which initially charged a premium rate to gauge customer value perception rather than undercut competitors.
To understand the impact of retention on growth:
Customers Remaining = Initial Customers × (1 − Churn Rate)12
For instance, with a 95% monthly retention rate starting from 100 customers:
Customers Remaining = 100 × (0.95)12 ≈ 54
With 90% retention:
Customers Remaining = 100 × (0.90)12 ≈ 28
This illustrates the drastic impact of retention on customer base over time.
Successful startups often build competitive advantages through:
Network Effects: More users create more value and attract even more users.
High Switching Costs: Making it difficult for customers to leave.
Lock-In: Retaining customer data can prevent churn.
Technical Innovation: Investing in R&D enables sustained competitive advantages.
Focusing on creating recurring revenue, understanding customer value, and refining your pricing strategy is essential for startup success. Emphasize innovation in your product while adopting proven business models for a sustainable path to growth.
This document covers essential strategies for early-stage startup founders on transitioning from user interaction to acquiring first customers. Key topics include:
The importance of doing things that don’t scale
Founders doing sales
Sales funnel overview
The necessity of charging for products
Working backwards from your goals
Founders should engage intimately with customers, especially in the early stages. According to Paul Graham’s essay, "Do Things That Don’t Scale", success often arises from direct interactions rather than automated processes. The key points include:
Quality products are rarely built in isolation; customer feedback shapes development.
Startups take off when founders manually recruit customers.
Founders must confront discomfort rather than hiding behind technical solutions.
Founders must learn to sell for the following reasons:
Understanding customer pain points is crucial for product-market fit.
Sales skills are intrinsic and ultimately cannot be outsourced until mastered.
Early sales efforts provide insight into the product’s value proposition.
To structure the sales approach, consider the following simplified funnel stages:
Lead Generation: Create a list of potential customers.
Initial Contact: Reach out via email or LinkedIn.
Demo/Meeting: Schedule calls to discuss the product.
Negotiation: Discuss pricing and terms.
Onboarding: Ensure customers start using the product effectively.
Key techniques for crafting effective sales emails include:
Keep it brief (6-8 sentences max).
Use clear, jargon-free language.
Address the recipient’s specific problems.
Avoid HTML formatting; use plain text.
Provide social proof by mentioning your team or past successes.
Include a link to your website with clear product information.
End with a strong call to action (CTA).
It’s critical to charge for your product as it signifies tangible value provided to customers. The following strategies are recommended:
Offer a money-back guarantee instead of free trials.
Use tiered pricing to provide flexibility and test customer willingness to pay.
Increase prices gradually until feedback indicates pushback.
To effectively track progress towards sales goals, understand the drop-off at each stage of the sales funnel. For example:
Sending 500 outreach emails might lead to a conversion rate of 2 customers.
Track each conversion rate to inform future outreach strategies.
Let N be the number of outreach emails sent, O the open rate, R the response rate, D the demo conversion rate, and C the final customer acquisition rate. Using hypothetical numbers:
N = 500, O = 0.50, R = 0.05, D = 0.50, C = 0.20
Calculating customers gained:
Open Rate = N × O = 500 × 0.50 = 250
Response Rate = 250 × R = 250 × 0.05 = 12.5 ≈ 12
Demo Rate = 12 × D = 12 × 0.50 = 6
Customers = 6 × C = 6 × 0.20 = 1.2 ≈ 1
Sales are an integral part of launching a startup. Founders must take ownership of the sales process by engaging directly with customers, understanding their needs, and refining their sales techniques through iterative learning. Remember:
Engage personally with customers.
Structure and track your sales funnel diligently.
Don’t shy away from charging for the value you provide.
A Minimum Viable Product (MVP) is a version of a new product that includes only the essential features necessary to satisfy early customers, which provides feedback for future product development.
The ’Midwit Meme’ illustrates the varying perspectives of different founders during the product development process:
The Jedi, representing highly knowledgeable founders who strive for perfection.
The Idiot, representing first-time founders who may lack experience but may make quicker, more effective decisions.
The goal is to prioritize launching a product quickly and iterating based on user feedback.
The main idea is to get a product to market swiftly. This approach enables founders to:
Begin learning about users’ needs.
Facilitate initial customer interactions.
Engage with users post-launch to gather feedback.
Iteratively improve the product based on real user experiences.
Spending extensive time on surveys and interviews without an actual product.
Avoiding the launch due to fear of negative feedback.
The key takeaway is that users don’t start providing valuable insights until they can interact with a product.
Founders often fear that an unfavorable reception will doom their startup.
"Your company doesn’t die if a first demo fails; it is an opportunity for learning."
There is a misconception that creating an MVP means compromising quality. Historical examples like the development of the iPhone demonstrate that even iconic products were released without full features. Each iteration improved the product.
Airbnb: Initially facilitated events with limited functionality (no payment system, no map, air mattresses only).
Twitch: Started as a single-stream service with minimal features before evolving into a complex platform.
Stripe: Launched as a barebones payment processing service with limited functionality, allowing early-stage startups to accept payments.
The ideal first customers for an MVP are those with pressing needs (e.g., "customers with their hair on fire").
They require immediate solutions, making them more likely to try imperfect products.
It’s tempting to bypass MVP development by seeking extensive user surveys. However, feedback is often limited and may mislead product functionality.
To ensure rapid MVP development:
Set a specific deadline for launching the MVP (e.g., two weeks to one month).
Document requirements and features essential for the MVP.
Prioritize features: Cut unnecessary features that do not meet immediate user needs.
Remember: Avoid emotional attachment to the MVP, as iterations will likely change its shape dramatically.
"It is far better to have a hundred people love your product than a hundred thousand who kind of like it."
Focus on building relationships with your initial users, as their insights will help refine the product significantly.
Launching a startup can be daunting for founders. Many overthink their first launch, believing they have only one shot to get it right. This document discusses key insights into launching correctly and iteratively, rather than striving for perfection.
Most founders hold strong convictions about their products but often base these on theoretical concepts without practical insight.
The best time to launch is ASAP (As Soon As Possible). Early launching allows for:
Gaining real user feedback
Identifying if there’s sufficient demand for the product
Concerns of launching too early include:
Product perception (ugly, ineffective)
Investor visibility
Competition awareness
Ignorance (no one seeing or caring)
These fears should not deter action; instead, they are opportunities to iterate.
Clarity of vision is essential. A clear, succinct message aids word-of-mouth growth, which is crucial for startups.
Descriptive: Clearly explain what the company does and for whom.
Conversational: Avoid jargon; use plain language.
Concise: Stick to one sentence.
Engaging: Pose a clear problem with an understandable solution.
Start with what your company does, then lead into why it matters. For instance, the company Pave states:
"Pave lets companies plan, communicate, and benchmark your compensation in real time."
Using empty marketing jargon
Rambling; sticking to concise messaging
Ineffective comparison formats such as "X for Y" unless clearly defined
Multiple strategies can be used for launching a startup:
Create a simple landing page with:
Domain Name
Short Description
Call to Action (e.g., sign up for a newsletter)
Test your pitch and product with friends and family for initial feedback, but do not linger in this stage.
Directly engaging with potential users provides invaluable insights. For instance, DoorDash spent time interviewing small business owners to refine their product.
Take advantage of platforms like Hacker News and internal networks, such as Y Combinator’s Bookface. Sharing in these environments can yield early adopters and valuable feedback.
After generating interest through waitlists (as seen famously with Robinhood), convert leads into active users promptly. Delays can erode interest.
Communicate with supporters and customers through newsletters and social media. Regular engagement leads to sustainable growth.
Instead of viewing launching as a one-time event, perceive it as an iterative process. Learn from early failures and keep launching until you find a fit that resonates with users. Notable companies have historically launched multiple times before finding success.
The journey of a startup spans from ideation, to prototyping an MVP, to scaling for millions of users.
Technical founder acts as a partner in the startup journey, requiring a commitment to building the product and talking to users.
Responsibilities include:
Leading product development.
Making crucial technical choices across various domains (frontend, backend, DevOps, etc.).
Engaging with users to derive insights for product iterations.
Roles can vary: CEO, CTO, or another position based on team composition and product type.
Early-stage role resembles that of a lead developer, encompassing both technical and user engagement tasks.
Emphasis on decision-making with incomplete information, and the acceptance of technical debt.
Aim to build a simple prototype quickly to demo to users, even if it lacks full functionality.
Techniques for rapid prototyping:
Use prototyping software (e.g., Figma, InVision).
Develop minimal backend scripts (e.g., a command line script).
Utilize 3D renderings for hardware concepts.
Example: Remora, which captured user interest through 3D renderings to demonstrate a carbon capture attachment for trucks.
Overbuilding at this stage, leading to a lack of focus.
Not engaging with users early enough to receive vital feedback.
Becoming too attached to initial prototypes or ideas, ignoring user feedback.
Develop an MVP that users are committed to, ideally monetarily, within a few weeks to months.
Hiring too soon can slow down the launch process and dilute critical product insights.
Example: Justin.tv, where the founders handled everything initially to ensure direct involvement and learning about their product.
Do Things That Don’t Scale:
Use manual processes over automated ones to gain initial traction.
Example: Stripe founders processed requests manually to get the product off the ground.
Create a 90% Solution:
Launch with a solution that covers core functionalities and features, postponing others for later.
Choose Tech for Speed:
Opt for technologies that allow for rapid development and iteration.
Example technologies include frameworks like React, serverless options like AWS Lambda, and third-party APIs.
Focus on obtaining product-market fit through continuous iterations and user feedback.
Establish analytics to track key performance indicators (KPIs).
Utilize soft data from user interviews to complement analytical insights.
Example: AYC company found success by pivoting from a B2C model to a payment API after user feedback.
Keep launching simplified versions of the product, iterating based on feedback.
Example: Segment continuously iterated and modified their product from classroom analytics to a powerful data routing tool.
Embrace technical debt and prioritize user feedback over perfecting the codebase.
Example: Pokémon Go, which faced significant technical challenges at launch but achieved massive success regardless.
Post-product-market fit, the founder transitions from a coder to a manager.
Starts to hire and develop engineering culture.
Communication overhead increases as teams grow.
Transition from developer roles to management roles requires strategic choices about team structure and collaboration.
Phases outlined:
Ideation: Aim for rapid prototyping.
MVP: Build quickly and iterate towards product-market fit.
Post-launch: Adjust, build features, and embrace technical debt.
Key takeaway: Startups move quickly.
How startup fundraising works, common misconceptions and myths about fundraising for startups.
Content on the topic of fundraising:
Paul Graham’s essays on fundraising, such as The Fundraising Survival Guide, How to Fund a Startup, and Understanding Investor Herd Dynamics.
Jeff Ralston’s guide to raising a seed round, covering the complete process.
Tactical guides on pitching, building seed decks, and utilizing platforms like AngelList.
The focus of this discussion is to address common myths about fundraising, rather than reiterate existing content.
Reality: Actual fundraising consists of numerous one-on-one meetings rather than dramatic pitches. For example, an analysis by a YC company, Fresh Paint, showed they met with 160 investors and took over four months to close their $1.6 million round.
$$\text{Conversion Rate} = \frac{\text{Number of Yes Responses}}{\text{Total Meetings}} = \frac{39}{160} = 0.24375 \; (\text{or } 24.375\%)$$
Fundraising is a grind, focused on conversations rather than spectacle.
Reality: Founders should focus on building a prototype or initial product first, rather than seeking immediate funding. The decreasing cost of technology makes it easier to launch with minimal investment. For instance, Solugen created a small prototype of a chemical reactor before raising $4 million, allowing them to prove their concept and initial revenue.
Reality: It’s essential to convince investors instead of impressing them. The early-stage concept of many successful startups, such as Airbnb and DoorDash, appeared unimpressive at first.
Reality: Early-stage rounds can be much simpler and faster than giant VC rounds. The introduction of the SAFE (Simple Agreement for Future Equity) has streamlined the process significantly.
SAFEs are typically five pages long.
Only a few key terms need to be discussed: amount of investment and valuation cap.
This allows Founders to raise funds quickly and without extensive legal fees.
Reality: Founders maintain control of their startups more than ever when using SAFE agreements. There are no board seats or voting rights given up at this stage.
Reality: While bootstrapping seems appealing, it often leads to distractions and a lack of resources. Instead, raising startup funds early on allows the company to build efficiently without the constant stress of financial instability.
Reality: Investors are primarily concerned with whether a startup is creating something people want, rather than the founder’s connections. For instance, Podium, a company founded by two individuals without a strong network, successfully made a fortune from their service.
In conclusion, if you’re considering starting a company, take advantage of the current fundraising landscape. From easier access to funding through SAFEs to a more supportive investor community, there’s never been a better time to launch a startup. Focus on building, iterating, and making something that users want.
Goal: Improve time management and expedite the journey to product-market fit.
As a startup founder, no one dictates how to spend your time.
Founders often feel pressured to optimize on multiple fronts, which can dilute focus.
The urgency of reaching product-market fit emphasizes the need for clarity in KPIs to prioritize effectively.
KPI: Key Performance Indicator that measures what matters and indicates if strategies are effective.
Prioritization: The process of determining the order in which tasks should be addressed to maximize impact on KPIs.
Example task list: Prioritization helps identify the one or two tasks that will most significantly impact KPIs.
Focus should be on tasks that directly contribute to achieving product-market fit and improving KPIs.
Vanity Metrics: Metrics that feel good but don’t drive business results.
Avoid distractions such as optimizing paperwork and premature scaling.
Identify top KPIs
Set a weekly KPI goal
Goal: 10 more paying customers by next week
Identify the biggest bottleneck affecting KPIs.
Create a prioritized task list.
Conduct retrospectives on task completion and results.
Continuously refine KPIs based on what improves growth rate.
Revenue growth is often the primary KPI.
$$\text{Revenue Growth Rate} = \frac{\text{Revenue}_{\text{new}} - \text{Revenue}_{\text{old}}}{\text{Revenue}_{\text{old}}} \times 100$$
Retention rate, customer acquisition cost (CAC), and unit economics.
Keep the list of secondary KPIs narrow (3–5).
Set long-term goals (e.g., $5,000 in monthly recurring revenue (MRR) by end of quarter).
Assess realistic weekly tasks and project growth from there.
Chasing Vanity Metrics: Such as free signups or unqualified users.
Low-impact Tasks: Focusing on paperwork over customer feedback.
Perfectionism: Making every decision feel monumental.
Downside Protection over Upside Growth: Spending time on minor problems instead of focusing on growth opportunities.
Regularly audit your task list and KPIs.
Align KPIs with long-term growth and revenue objectives.
Share goals within community for accountability.
Metrics are crucial for startups as they inform decision-making processes. Just as a pilot requires instruments for a successful flight, startup founders need metrics to navigate their business effectively. Without metrics, founders may operate "blind," potentially jeopardizing their startup’s success.
Better metrics lead to better decisions.
Metrics allow for tweaking and iterating on products and operations.
Founders often fall into one of two extremes regarding metrics:
Blind Launch: Some founders launch without any metrics in place, later scrambling to add them.
Overcomplication: Others may create overly complex dashboards with hundreds of metrics that are impractical to track.
Metrics should not replace customer engagement or insight. Founders should continue interacting with customers to understand their needs and feedback.
Choose four to five key metrics to focus on initially.
Verify that everyone in the team agrees on these definitions to avoid internal disagreements.
Maintain clear definitions of each metric over time to ensure consistency and comparability.
For example, the definition of an "active user" must be agreed upon by all team members.
For most B2B startups, Revenue is a critical metric, serving as the primary indicator of success.
Example equation for Revenue:
Revenue = Price per Unit × Number of Units Sold
Burn Rate is defined as:
Burn Rate = Monthly Costs − Revenue
It indicates how quickly a startup is using its capital.
Runway is derived from the Burn Rate, indicating how long the startup can operate before needing additional funding.
$$\text{Runway} = \frac{\text{Cash in Bank}}{\text{Burn Rate}}$$
This metric tracks the percentage of customers who continue to pay over time.
$$\text{Retention Rate} = \frac{\text{Customers at End of Period}}{\text{Customers at Start of Period}} \times 100$$
This is calculated as:
$$\text{Net Dollar Retention} = \frac{\text{Revenue from existing customers at end of period} - \text{Revenue lost from churn}}{\text{Revenue from existing customers at start of period}} \times 100$$
A Net Dollar Retention above 100% indicates growth in revenue from existing customers.
Gross Margin can be defined as:
$$\text{Gross Margin} = \frac{\text{Revenue} - \text{Cost of Goods Sold}}{\text{Revenue}} \times 100$$
High gross margins are essential for sustainability, especially in operationally intensive businesses.
Track four to five key metrics before launching.
Regularly review metrics to rule out vanity metrics and ensure consistency.
Stay close to customers; rely on metrics in combination with product intuition.
The right blend of metrics, customer interaction, and product intuition is vital for effectively running a startup. Keep iterating and adapting based on the feedback gained from both metrics and customer interactions.
This document summarizes important metrics and strategies for consumer startups, particularly focusing on user growth, unit economics, retention, and the net promoter score (NPS).
The primary metric tracked is the growth rate of active users.
Recommended growth rates:
15% month-over-month (MoM): Target for optimal growth, leading to a 5x increase in user base annually.
10% MoM: Acceptable, leading to 3x increase annually.
5% MoM or lower: Unlikely to achieve breakout success.
Organic Growth: Growth that does not involve paid marketing.
Achieved through virality and network effects.
Example: Monzo reached a million customers without spending on direct marketing.
Paid Growth: Growth obtained through paid advertising channels.
One user’s engagement leads to the introduction of your product to new users.
Examples include:
Facebook: Tagging friends in pictures leads to them signing up.
Wordle: Users sharing scores attracts new players.
The value of a product increases as more nodes (users) join.
Example: WhatsApp becomes more useful as more contacts are available to message.
Identify shareable moments in your product.
Create features that improve with increased user participation.
Treat referral schemes as paid acquisition.
Monitor for:
Cannibalization: Paying for users who would have signed up organically.
Fraud: Prevent manipulation of referral bonuses.
Measure the cost of acquiring a paying or active user.
Simple tracking methods:
Use UTM referral parameters or directly ask users where they came from.
CAC formula:
$$\text{CAC} = \frac{\text{Total Spend on Acquisition}}{\text{Total Number of Users Acquired}}$$
Track performance per channel to optimize acquisition efforts.
Measure revenue generated per customer and deduct variable costs.
Unit economics formula:
Unit Economics = Revenue − Variable Costs
Costs that vary with the number of customers.
Examples: Customer service costs, transaction fees.
Define the active user period (daily, weekly, monthly).
Example: Monzo’s active user defined as at least one transaction per week.
Identify user behaviors correlated with long-term retention.
Design product flows to help users reach this moment quickly.
Measure of customer loyalty and likelihood of word-of-mouth referrals.
NPS Formula:
NPS = %Promoters − %Detractors
Recommended NPS threshold: Positive 50.
Targets for Consumer Startups:
At least 15% MoM.
Aim for 50% or more through virality/network effect.
Generate positive earnings per user.
Identify and optimize for magic moments.
Maintain a score greater than +50 for success.
Remember, these metrics are benchmarks; each business will differ.
In this talk, we will explore the process of closing your first Enterprise customers, focusing on various steps in the sales funnel, including:
Prospecting
Outreach
Qualification
Pricing
Closing
Implementation
This guidance is tailored primarily for software startups but can apply broadly to any founder starting out with sales.
Sales is the number one concern for many founders.
Sales can be learned; technical founders can become effective salespeople.
Understand that as the founder, you are capable of selling your product.
If you struggle to sell your product, it may indicate issues with the product itself.
Definition: Prospecting refers to identifying potential customers.
Develop a sales hypothesis:
Hypothesis: Customer X has Problem Y and our product will help.
Identify target companies by purchasing industry lists and applying filters based on the problems your product solves.
Use tools such as BuiltWith to find target prospects.
Goal: The aim is to schedule meetings with prospects.
Generate inbound demand through content creation (videos, blogs).
Attend industry conferences and seek warm introductions.
Utilize platforms like Apollo and LinkedIn Sales Navigator for outreach.
Write personalized emails instead of mass templates.
Avoid talking to non-relevant individuals; focus on qualified prospects.
Objective: Qualify the prospect to ensure they have the problem you can solve.
What problem are you trying to solve?
Who else is affected by this problem?
What is your budget for solving it?
Who are the decision-makers?
Purpose: Demonstrate how your product solves the prospect’s problem.
Start by reiterating the prospect’s problem.
Create a narrative around the demo instead of just showcasing features.
Personalize the demo using the prospect’s data (logo, website).
Guidelines: Approach pricing carefully, utilizing the insight gained during qualification.
How much is this problem costing the company?
What is their existing spend on competitors?
Charging too little; prioritize learning over immediate profits.
Avoid offering free products in exchange for feedback.
Overview: Closing is a multi-step process involving various approvals.
Security and compliance reviews.
Legal reviews and amendments (redlining).
Maintain communication with your champion at the prospect’s company.
Essential Insight: Implementation is part of the sales process.
Engage in project management to ensure smooth implementation.
Collaborate with the customer’s team to outline a detailed implementation plan.
Selling is a skill that improves with practice and experimentation. Founders should focus on the following takeaways:
Engage with prospects frequently.
Learn continuously from sales efforts.
Build relationships that not only focus on immediate sales but the long-term use of your product.
To further enhance your understanding of sales, consider reading Peter Kazi’s book Founding Sales. The most critical point is to get started!
Pricing is a critical challenge for startup founders, especially when determining how much to charge for software products. It is essential to balance perceived value, company costs, and competitive market rates.
Three core elements need to be considered when setting a price for software products:
The value equation is the foundation for pricing. It quantifies the value your product delivers to the customer. To calculate the value:
Engage with the customer champion to outline the expected benefits of your product.
Identify how it affects cost savings, time savings, or revenue enhancement.
Suppose you are selling a customer service tool to a company with 100 agents, each costing $100,000 annually. If your product reduces queries by 20%, the value savings would be:
Value Savings = 0.2 × (100 × 100, 000) = 2, 000, 000
Typically, charge between 25% and 50% of the value:
$$\text{Price Charged} = \frac{1}{3} \text{ of Saving} = \frac{1}{3}(2,000,000) \approx 700,000$$
Understanding the costs to deliver your service is crucial. While it should not dictate pricing, it provides a foundation.
Ensure costs are below the price derived from the value equation.
Strive for high margins (ideally 80-90%).
If your costs total $200,000, that’s well below the determined price of $700,000, thus sustainable.
If a competitor underprices your product, avoid engaging in a price war:
Focus on differentiating features or unique value propositions.
Aim to avoid a race to the bottom commonly seen in commodity markets.
Investigate how your target market typically pays (monthly, annually, usage-based, etc.). Align your payment structure accordingly.
Keep your pricing model simple. Complicated pricing can deter customers.
Aim for Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) rather than variable usage-based models to protect revenue during downturns.
Long trials may be counterproductive. Instead:
Keep trials short (2-4 weeks) with clear success metrics.
Consider offering an annual contract with a money-back guarantee.
If uncertainty clouds your pricing strategy:
Start with a benchmark price similar to existing software.
Incrementally increase your prices with each new customer.
If the initial price is $10,000, you might consider:
New Price = Previous Price + (Previous Price × 0.5)
To summarize:
Focus on the value equation to derive pricing.
Ensure costs are substantially less than the price you set.
Differentiate from competition without engaging in price wars.
With these strategies, founders can justify pricing to customers while maximizing revenue and maintaining sustainable operations.
Focus on tech software startups expected to be VC funded.
Particularly relevant for pre-product market fit companies.
Be Generous with Co-Founder Equity
To motivate the founding team during challenging early years.
Avoid stinginess in equity that can lead to resentment and loss of talent.
Aim for close to equal equity splits to maintain motivation and commitment.
Equity typically vests over a period (often 4 years).
Cliff: No equity is granted until a specified duration (e.g., 1 year) is completed.
Purpose: Provides protection against early departures and ensures commitment.
Founding team should consist of the smallest number of people necessary to create a Minimum Viable Product (MVP).
Avoid giving co-founder titles too freely to prevent diluting the importance of the role.
Equity should be distributed to motivate for future work rather than reward past contributions.
CEO needs authority to let go of underperforming co-founders regardless of equity splits.
If a co-founder leaves or is fired before their one-year cliff, they typically retain a small token amount of equity (2-5%).
Co-founders leaving after the cliff should not retain more than 5% of the company.
Severance packages may be offered (1-3 months), but are not mandatory for voluntary departures.
Require resigning from the board and giving proxy voting rights to remaining founders.
Agreement-based splits: Just because a co-founder agrees to a split does not mean it is equitable long-term.
Idea contribution claims: Ideas alone have little value without execution; hence, greater equity shouldn’t be based solely on idea generation.
Seniority or experience: Greater experience does not justify a larger equity share; all contributions should be valued equally for future needs.
Salaries vs. Equity: Equity should be viewed as motivation, not compensation for salaries.
Avoid tying equity to performance metrics that can be unpredictable at startup.
Focus on clear, standard practices that ensure motivation and accountability among founders.
Emphasize the importance of early co-founders in the success of a tech startup.
Ensure equity distribution fosters long-term commitment and motivation.
Understand that the foundation established in early years is critical for future success.
Cohort retention is a vital metric for startup founders to assess if they have created products that people want. This metric helps in tracking how many new users continue to use a product over time.
Cohort retention involves tracking the fraction of new users (cohorts) who continue using a product in subsequent time periods. The fundamental idea is to isolate groups of users based on when they first used the product and measure their activity over time.
To effectively analyze cohort retention, three dimensions must be defined:
Cohorts - Groups of new users defined by a common criterion, typically their sign-up or usage month.
Actions - Specification of what constitutes an active user, such as:
App opened
Specific feature utilized
Time Period - The granularity of the analysis, which can vary based on the product usage pattern (daily, weekly, monthly, etc.).
In each row, a cohort’s performance is measured over time, indicating how many users from that cohort returned in subsequent months.
To better interpret the data, cohorts can be normalized by dividing the number of users retaining by the initial cohort size:
$$\text{Retention Rate} = \frac{\text{Returning Users in Month}_{n}}{\text{Initial Users in Month}_{1}} \times 100$$
Cohort retention curves provide a visual of how well different cohorts retain users over time.
Determining whether cohort retention is good or bad relies on the shape of the retention curves:
Curves that flatten over time indicate stable usage.
Consistent drop-offs may signify retention issues.
It is crucial to focus not on the absolute numbers but on whether the curves are flattening.
Choosing Inappropriate Time Periods: Using overly broad timeframes misrepresents retention metrics.
Picking Easy Actions: Actions like simply opening an app do not reflect true engagement.
Focusing on a Single Point in Time: This does not indicate the overall trend and misrepresents product performance.
Relying Solely on Analytics Tools: Ensure that the metrics match your definitions of cohorts and actions.
Several strategies can be employed to enhance retention rates:
Improve Product - Incremental enhancements can lead to better user experience.
Acquire Better Users - Target users who are more likely to benefit from your product.
Enhance User Experience - Focus on onboarding processes and first-time user experience.
Network Effects - Leverage network dynamics to improve user retention.
Cohort retention is a vital tool for startups. The goal should be to achieve curves that not only flatten but rise over time. By closely monitoring these metrics and engaging with users, founders can better understand their product’s value and improve it effectively.
Cold emailing can be a powerful tool for sales, recruiting, partnerships, or outreach. This guide provides tips for crafting emails that capture attention and drive responses.
Warm Intro: The most effective method for email outreach success. Conversion rates can be 2 to 3 times higher with a warm introduction.
Use your network: Leverage LinkedIn, friends, co-workers, alumni networks, etc., to find connections who can facilitate warm introductions.
Understanding your sales conversion funnel is crucial. Start with your goal, such as acquiring a new customer, and work backwards to estimate necessary outreach.
Let:
C = new customers
D = product demos
R = email responses
O = email opens
S = emails sent
Assume:
Demo to customer conversion rate = 10%
Email response to demo sign-up conversion rate = 25%
Response to open conversion rate = 10%
Open rate from emails sent = 50%
Based on the above, we derive the following equations:
$$\begin{aligned}
C &= 1 \quad (\text{goal}) \\
D &= 10 \quad (\text{from } 10\% \text{ conversion}) \\
R &= 40 \quad (\text{from } 25\% \text{ conversion}) \\
O &= 400 \quad (\text{from } 10\% \text{ conversion}) \\
S &= 800 \quad (\text{from } 50\% \text{ conversion}) \\\end{aligned}$$
Thus, to get 1 Customer, 800 emails must be sent.
Better Targeting: Focus on sending fewer, high-quality emails rather than spamming many untargeted ones.
Email Structure: A personal name in the From field, and a short, relevant subject line improves open rates.
Have a Focused Goal: A single clear action (e.g., reply, schedule a demo).
Be Human: Use informal language and express emotions genuinely. Example: “This would mean a lot to me.”
Personalize: Use recipients’ names and specific details about their work or interests.
Keep it Short: Ensure the email is concise and easy to read.
Establish Credibility: Mention relevant credentials, past collaborations, or known clients.
Focus on the Reader: Frame your message as solving their problems, not just about you.
Clear Call to Action: Specify the next steps you want the recipient to take.
One email is often not enough due to busy schedules. Plan to follow up several times, being persistent but not annoying. Allow a few days between emails.
Effective cold emailing requires effort, personalization, and strategic communication. Start learning by sending personalized emails manually before considering automation to ensure quality engagement.
Starting a successful startup is a challenging endeavor. This guide outlines why having a co-founder is essential, when to consider bringing one on board, and ways to find a suitable co-founder.
There are three primary reasons for needing a co-founder:
Building a startup requires extensive effort. Two founders can accomplish more than one by distributing tasks and responsibilities, leading to better productivity:
Total Work = Work1 + Work2
where Work1 and Work2 represent the contributions of each founder.
The journey of a startup is filled with ups and downs. A co-founder can provide emotional support during difficult times, making the entrepreneurial rollercoaster manageable.
Most successful startups have co-founding teams. Notable examples include:
Facebook: Co-founded by Mark Zuckerberg and Dustin Moskovitz.
Apple: Co-founded by Steve Jobs and Steve Wozniak.
In 90% of cases, prioritize finding a co-founder before starting the business. However, there are scenarios where starting alone may be acceptable, including:
A specific idea that you are passionate about and have domain experience in.
The ability to progress independently (ideally as a technical founder).
Drew Houston applied to Y Combinator as a solo founder, but was initially advised to find a co-founder. He brought on a co-founder and continued to make progress concurrently.
Key considerations when evaluating potential co-founders:
The ability to handle stress is crucial. Prior collaborative experiences under pressure can help gauge this trait.
Discuss aspirations and expectations early to ensure compatibility in mission and vision:
If one founder aims for fast growth while the other prefers a lifestyle business, friction may develop later.
While technical skills are important, focus on adaptability and the potential for growth in skills rather than specific qualifications.
Begin networking long before you need a co-founder by working on projects with potential collaborators.
Open Source Projects: Engaging with open-source initiatives.
Hackathons: Meeting like-minded individuals.
Developer Meetups: Networking opportunities.
Y Combinator Co-Founder Matching Platform: Connect with potential co-founders with shared interests.
If you are not familiar with a potential co-founder, test your compatibility:
Spend time working on small projects together.
Have discussions to understand each other’s motivations.
Once you decide on a co-founder, consider the following:
It’s generally advisable to start with an equal equity split to foster investment in the venture and maintain a healthy partnership.
Respect Issues: Differing responsibilities (e.g., one handling sales, the other tech) can strain relationships if mutual respect declines.
CEO Competition: Multiple co-founders vying for the CEO position undermines team unity.
Different Work Ethic: Misaligned expectations around effort and commitment can cause significant friction.
To avoid breakups:
Create a routine for check-in meetings to address concerns before they grow into major issues.
Finding the right co-founder is critical for startup success. It requires patience, open communication, and alignment of goals to navigate the challenges that arise during the entrepreneurial journey.
Best of luck in your search for a co-founder!
The term MVP stands for Minimum Viable Product. The key word here is viable; a product must work sufficiently to serve a purpose for customers. An MVP is not just a simple product but must be useful in some way.
A MVP should:
Be functional and provide value to early customers.
Allow for testing assumptions about the product and market.
Venture Capital is a method of financing where investors provide capital to startup companies in exchange for equity.
High reward potential, accepting significant risk.
Investments often cover multiple startups; it is common for most to fail while a few succeed massively.
Historical context: originated in the whaling industry, where investors funded multiple ships with the hope one would succeed.
An angel investor is an individual who invests their own personal funds into a startup, often at an early stage.
Invests smaller amounts (e.g., $20,000 to $50,000).
Typically not a full-time activity; may have their own business, be retired, etc.
No formal qualifications required to be an angel investor.
Profitability is defined as generating more income than expenses.
Analyze how profit margins change as the business scales.
Example: Google was not profitable initially but became very profitable once its advertising model was implemented.
Profit can be represented as:
Profit = Revenue − Expenses
Burn rate refers to how much money a startup is losing each month.
Essential for startup founders to monitor.
Indicates the health of the startup relative to its cash reserves.
Burn Rate = Initial Capital − Final Capital
A seed round is the initial round of capital raised by a startup.
Can vary widely in amount and structure.
Often involves smaller investments and may not have a lead investor.
Product Market Fit refers to the stage when a product meets the demands of a market effectively.
Pre-PMF: Focus on defining customer needs and product iterations.
Post-PMF: Focus shifts to scaling, maintaining fit, and optimizing performance.
Bootstrapping refers to starting and growing a company using personal funds or generated revenue.
Full control over business decisions.
Suitable for businesses not aligned with high growth ventures.
A convertible note is a financial instrument that acts as a debt but can convert into equity.
Usually carries interest and must be carefully examined.
A SAFE is an agreement allowing investors to convert their investment into equity under certain conditions without the complexities of a convertible note.
Simpler terms compared to convertible notes.
Commonly used during seed rounds.
Equity represents ownership in a startup.
Founders, employees, or investors hold equity in varying forms (e.g., stock options).
Stock options allow future execution for acquiring shares.
TAM is the total revenue opportunity available if 100% of the target market used the product.
Used to assess market potential.
Important to keep in mind that TAM can be underestimated.
Valuation indicates the estimated worth of a startup during an investment round.
Determined by the last investment round.
Not necessarily indicative of liquid market value.
An IPO marks the transition of a company from private to public by issuing shares on the stock market.
Provides liquidity for founders, employees, and investors.
Viewed as a milestone of financial maturity for the company.
ARR is the measure of revenue a company can expect to receive on an annual basis from subscriptions.
ARR = ∑(Customer Contracts)
For example, if there are 10 yearly contracts at $100,000 each:
ARR = 10 × 100, 000 = 1, 000, 000
Monthly Recurring Revenue (MRR) relates to monthly subscriptions, while ARR pertains to annual contracts.
Understanding these fundamental terms is critical for navigating the world of startups and investment financing.