- The speaker discusses the keys to creating a successful startup and the problem of distribution.
- They mention the success of the PayPal Mafia group in creating valuable companies.
- The speaker explains the importance of finding a market need that is not being addressed and the difficulty of finding a market that is neither too small nor too big.
- They also emphasize the importance of having a simple and engaging product hook that users will repeatedly engage in.
- The speaker mentions that product market fit is important but not the only factor in building a billion dollar company.
- They discuss the need for a scalable distribution model and the challenge of finding innovative distribution techniques that are not copied and spammed.

- To have a successful startup, it is important to focus on innovative distribution methods, not just the product itself.
- Many startup founders make the mistake of not considering how to make their product grow and struggle to gain users.
- Virality is a popular technique, but traditional methods like invite forms are no longer effective.
- Creating a network effect or a technical barrier can make a product non-copyable and more defensible.
- It is difficult to figure out all these factors before launching a product, but having a clear product hook and scalable distribution model is crucial.
- A successful product with adjacencies can lead to a billion or even a 10 billion or 100 billion dollar company.
- PayPal's success was due to its innovative distribution methods, such as viral strategies and using eBay as a platform.
- The launch of Facebook's platform changed the industry's mindset and encouraged derivative applications.

- PayPal used innovative distribution tactics, such as embedding payment forms on websites, to drive users back to their platform
- This technique was also used by other PayPal mafia companies, like YouTube, to gain traction
- The scrappiness around distribution is a key factor in the success of PayPal mafia companies compared to ex-Googlers
- The tactics that worked in the past may not work today, as the landscape constantly changes
- The product hook for PayPal was a simple payment form, while for Yammer it was a status update form asking what users were working on
- Copying is a fact of life in the startup world, but founders should focus on original ideas and innovation to stand out.

- The speaker discusses the importance of protecting your innovation and maintaining pricing power
- They suggest measuring user engagement through metrics like monthly active users and retention rates
- The speaker shares their experience with Yammer and how they applied consumer techniques to an enterprise product
- They explain the need to think through the market need for a new product, especially in the enterprise space
- The speaker discusses the reasons behind Yammer's acquisition by Microsoft, including integration with Microsoft's killer apps and cultural fit
- They mention the success of Alipay in China and the importance of combining ideas from existing products with new ones
- The speaker talks about the shift towards mobile and the cloud, and the trend of slimming down application interfaces for a single call to action, like Uber
- They emphasize the importance of talking to customers and building a minimum viable product to gauge market need.

- The lean startup methodology is important in the early stages of a business to gauge market need and experiment with product development
- Once a product starts gaining traction, it is important to rapidly scale up and not be afraid to invest in growth
- The PayPal team focused on both product and distribution, recognizing the importance of bringing a product to market in a scalable way
- The team was recruited through friendship networks, which created a cohesive and scrappy culture
- Ignorance of conventional wisdom can be beneficial in pursuing innovative ideas
- Growth hacking has become institutionalized and there is a danger of relying too heavily on testing and analytics, rather than creative thinking
- No plans for future films, and being a consultant in the early years had its benefits but joining a startup now is advantageous due to the availability of resources and support.

- The speaker reflects on the lack of resources and knowledge sharing available when he started his entrepreneurial journey
- He discusses the potential of Bitcoin and its decentralized nature
- He advises caution when considering starting a Bitcoin startup due to the risks and competition in the space
- The speaker suggests looking for overlooked industries or vertical plays for startup ideas
- He emphasizes the importance of being excited about and personally using the product or service being developed
- The speaker concludes by taking a break and providing directions to the bathroom.

- The speaker discusses the keys to creating a successful startup and the problem of distribution.
- The importance of finding a market need that is not being addressed and the difficulty of finding the right market size.
- The importance of having a simple and engaging product hook that users will repeatedly engage in.
- Product market fit is important but not the only factor in building a billion dollar company.
- The need for a scalable distribution model and the challenge of finding innovative distribution techniques.
- Many startup founders struggle to gain users and should focus on innovative distribution methods.
- Virality and traditional methods like invite forms are no longer effective.
- Creating a network effect or a technical barrier can make a product non-copyable and more defensible.
- Having a clear product hook and scalable distribution model is crucial before launching a product.
- PayPal's success was due to its innovative distribution methods, such as viral strategies and using eBay as a platform.
- The launch of Facebook's platform changed the industry's mindset and encouraged derivative applications.
- Copying is a fact of life in the startup world, but founders should focus on original ideas and innovation to stand out.
- The importance of protecting innovation and maintaining pricing power.
- Measuring user engagement through metrics like monthly active users and retention rates.
- The importance of talking to customers and building a minimum viable product to gauge market need.
- The lean startup methodology is important in the early stages of a business.
- Once a product starts gaining traction, it is important to rapidly scale up and invest in growth.
- The PayPal team focused on both product and distribution and recruited through friendship networks.
- Ignorance of conventional wisdom can be beneficial in pursuing innovative ideas.
- Growth hacking has become institutionalized, but creative thinking is still important.
- The potential of Bitcoin and caution when considering starting a Bitcoin startup.
- Look for overlooked industries or vertical plays for startup ideas.
- Be excited about and personally use the product or service being developed.

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David Sacks, CEO and Founder of Yammer is one of Draper Universities guest speakers during our Winter 2014 Session. Listen to his fantastic talk on creating a Billion dollar business here! 

http://www.draperuniversity.com

All right, thanks for having me and thanks for that introduction.

It's been a while since I saw the movie trailer.

So today I thought I'd talk about Some of the keys to creating a unicorn.

So basically, there's a good article in TechCrunch recently talking about the probabilities of creating, of Starbucks creating

a billion dollar company, and they were rare enough that the author sort of labeled them

Probably the most frequently asked question I get asked by entrepreneurs is, you know, what it takes to create a successful startup, what would be considered a good startup idea, or they asked me to evaluate their specific idea.

So what does it take for startups to succeed?

And as part of that, I want to talk about the problem of distribution, which is how people find out about your product.

And then I'm going to sort of tie things together by answering the question, what was in the water at PayPal?

Why did PayPal spawn so many successful companies?

There are 7 unicorns have been founded by the PayPal Mafia group, which is the group of people who were part of PayPal before it was acquired by eBay.

And there are only about 220 people in that group.

So statistically it's been this really unusual thing that a relatively few number of people

in Silicon Valley have created so many valuable companies.

I want to talk about why that might be the case.

So to my mental model, this is sort of what I run through when somebody presents me with an idea.

So you start at the top of this funnel and you've got a founder who has an idea, but it's still sort of in the realm of fantasy.

They're hoping it can be a billion dollar idea.

And I kind of run it through these filters.

So the first thing I kind of ask is, is there a market need?

The raison d'etre of every entrepreneur is to figure out some need that isn't being addressed by the current market.

And this isn't exactly easy because markets aren't totally inefficient.

So there's a lot of existing companies addressing needs.

And so to figure out something that isn't properly being addressed is non-trivial.

I think 1 of the tricky things about discovering markets is that it can neither be too small nor too big.

On the too small side, I once had an entrepreneur pitch me this idea for a new auction site that would use videos of the product.

And I said, well, wait, that's basically eBay, but instead of photos, you're using videos.

And they're like, well, yeah, but videos are a lot better than photos.

And I said, well, that might be the case, but you haven't really discovered a market need.

That amount of differentiation is not sufficient to really create a new site and disrupt eBay.

That would be an example of something being too small.

I think you see this sort of problem quite a bit where the innovation is just too incremental to really, truly be addressing a sort of a market need that the market for that is going to be too small.

On the other side of it, a market can be too big.

So I think 1 of the problems that happened with the whole kind of clean tech boom is that they were trying to disrupt the energy space, which was just so big that fracking came out of nowhere And basically almost like stole that opportunity.

And so most of the clean tech companies have not worked.

And so there's this problem that if your market is too vast that or if you've defined it to be too vast, there's gonna be too much competition and too many unforeseen things can happen.

And so you almost want the market to be discreet, something that you can get a foothold very quickly, but then you can expand it over time.

And so the classic example would be something like Facebook, where its initial market was Harvard.

Within 2 weeks, it had completely taken over Harvard.

Then it expanded to all colleges and universities.

And so ideally, what you want is for your initial market to be something you can win.

It's small enough that you can win it, and yet it's still a meaningful market that you can kind of expand what you're doing to do something bigger and bigger.

And so those types of combinations are sort of difficult to find.

Once you sort of have an idea of what your market need is, you develop the product.

And the thing I look for for a product is what I call the hook, which is a simple interaction that users will believably engage in.

So sometimes I see entrepreneurs who've got this great idea for a market.

They have pointed out some market that's inefficient.

But they haven't been able to productize that insight into something that I believe people will actually use.

And really, what you're looking for here is a simple behavior that users will repeatedly engage in.

Or it's you push a button and a town car shows up.

And that sort of Uberfication now, which is the sort of creating push button interfaces that do 1 thing, I think it's an even more important design principle now in the age of mobile.

The problem with designing a site that doesn't have a hook is that it's very hard to get users to engage in more complicated behaviors if you can't get them to engage in a simple behavior.

And so complexifying your product and adding a whole lot of bells and whistles won't necessarily improve it if there's not like a core behavior that users are willing to engage in.

Now, sometimes you'll get products that the hook is just explosive.

And even to the point where the entrepreneurs didn't even know what their market need was.

I mean, Twitter was kind of like that where it just took off.

I'm not sure that the creators knew exactly they'd be disrupting the news industry or sort of taking that over.

But they felt like people would use the product.

And I think that's also a very sound way to go, that you can sort of, you know, given a choice between a founder who's discovered a market need versus 1 that has a great product hook, I would rather take the product hook, even if it means that they still have to figure out what market they're actually disrupting.

And this is why entrepreneurial types tend not to be the super analytical sort of, It's not necessarily the McKinsey consultants or the Harvard MBAs who figure out these new markets.

It's the more eclectic, idiosyncratic entrepreneurs who figure this stuff out because they're able to actually build a product that has a hook and gets traction, which I think is very frustrating to the people who would like this process to be more tracked and sort of analytical.

But I think it's worth keeping that in mind.

So once you have a product hook and a market need, you've got product market fit, which is that all important concept.

But I don't think that product market fit is sort of the entirety of what

you need to build a billion dollar company.

I think there's 2 other things that you really need.

So the third 1 is a scalable distribution model.

Again, distribution is the question of how do people find, discover, use your product.

It could be sales, it could be SEO, It could be using friend virality, using Facebook's platform to go viral in the feed.

It could be what I would call real world virality where you share an Uber with somebody and now that person has discovered Uber and they will use it.

So this idea of how do you quickly scale, how do you have a technique that gets you to scale is very important.

And what's I think tricky about this is what I would call the law of distribution arbitrage, which is that successful distribution techniques are copied until they are no longer unusually effective.

Okay, so if you think about SEO, the first people to use that technique got a lot of traffic from Google.

Then a whole bunch of people started doing it, and they started gaming the system, and then eventually Google did their notorious Panda release,

and everyone who was using SEO basically lost most of that traffic, and the rug was pulled out from under them.

If you look at Facebook platform, The friend virality was very, very powerful in the early days.

And then eventually people got sick of the spam and

If you look at kind of the early days of social networks, all of them use an address book importer and would blast your whole, you know, email address book.

And that worked until people stopped clicking on the invites.

And so the techniques that work initially to get distribution do not, they don't stay working I guess.

And the reason is because everyone copies them until the channels are just spammed to death.

And so what this means is that typically if you're going to have a breakout startup, you've really got to think about how you're going to innovate on distribution, not just product.

And the biggest mistake I see these days that I see brilliant startup founders who are brilliant product people and they've really thought about their product but they haven't really thought about how they're gonna make it grow and then they launch their product and it's like crickets chirping no 1 no one's using it and they're kind of flummoxed as to what to do because they've never really spent time thinking about it.

And they just kind of assume that, hey, if you build a

And the reality is it's a big web out there.

You really have to think about how people are going to get to it.

And 1 of the issues here is that I'm pretty impatient.

I think people who invest in VCs are pretty impatient.

I mean you kind of have about 5, 6 years or so to build a billion dollar company or people will kind of assume that it's not going to happen.

It'll be hard for you to recruit talent and so on down the line.

And so if you're going to build that much value in such a short amount of time, you've got to have some really unusually effective way of getting lots of users really fast.

And when you just think about the fact that users resist being, you know, new ways of acquiring them, They sort of get inured to all the ways that you try to get their attention.

The 1 that I, the technique that I like the best is Virality.

So all the products that I've been part of creating, whether it's PayPal, Junior, Yammer,

in terms of just doing this whole sort of invite your friend, AdWords Book Importer Virality, doesn't work anymore.

I mean, people are sick of filling out invite forms.

There has to be something in it for the inviter or the recommender.

So thinking about their motivation and why they would do this, why they would invite a friend or a

business colleague or something like that is critical.

You know, at Yammer, we were 1 of the first companies to make enterprise software viral.

And because that had never really been done before, we were able to get tremendous traction in the enterprise.

I'm not sure those same techniques would work today, because enough people have now copied Yammer's distribution technique that

it might not be as effective 5 years later.

So if this wasn't challenging enough, you've got a product that's got product market fit.

You've also figured out scalable distribution technique, so it's growing really fast.

There's just really 1 more thing you have to figure out, which is how do you create

1 of the problems with creating software is that it's very easy to copy.

I'm just saying anybody can look at your UI and basically reverse engineer their own version of your product.

And believe me, if you get any measure of success, if you create a product that gets any kind of product market fit or distribution, within months you will have people copying you, whether it's sort of the European version of your product launched by the Samwar brothers or some big company takes notice and puts what you're doing on their roadmap, somebody's going to notice and start copying what you're doing.

You know, within months of launching PayPal Genie and Yammer, we had sort of copycats, including really big companies.

In the case of Yammer with Salesforce, it took them about 18 months to launch their product, which sounds like a long time, but they also have a lot more sales and marketing muscle behind their product than we did.

And so even though it was 18 months delayed behind us and the product wasn't as good.

They already had an existing customer base and a huge army of salespeople and a huge marketing budget, and we didn't have any of those things.

And so the question is, how are you going to compete against the inevitable copycats, clones, competitors and big companies who wake up to the idea once you've taught the market that it was lacking.

And so I think the key here is there's a number of different techniques.

I mean, Obviously, probably the best 1 is network effects of some kind.

You know, you've got like a 2 or 3 sided marketplace here.

You can copy the product, but you can't copy the network of people who started using it.

Maybe there's some, I like this less, but there could be some technical barrier that's just extremely difficult to copy.

So if you take a look at like Dropbox, you would think that desktop sync would have been copied a long time ago, but it was actually such a technically difficult problem to get the usability of it so perfect, the way that Dropbox did, that that barrier's proven to be pretty enduring, and then there's sort of this, this sort of network effect that comes about through sharing.

So again, I think that's sort of the fourth thing to think about is just how do you make your product non-copyable?

And I don't want to make this too depressing because I think it's like almost impossible to figure out these 4 things ex-ante before you launch your product.

If you can just think about the first 3, I think you're in pretty good shape.

And quite frankly, if you can figure out your product hook and a scalable distribution model, you can figure out everything else later.

You can figure out, actually, You may not even have total clarity about the market you're disrupting, but you'll learn that over time.

And you may not have figured out how to build your moat, but you'll figure that out.

But you do need, I think, a pretty clear idea of what your product hook is going to be and how to scale distribution.

Once you do those 4 things, you will have a billion dollar company.

No fast growing product that has a real market behind it and can't easily be copied

in Silicon Valley doesn't achieve a billion dollar valuation.

So that gets me to bonus points, what I would call bonus billions, which is if you can create a product with adjacencies, then you will not just have a billion dollar company, you could have a 10 billion or a hundred billion dollar plus company.

And an adjacency are markets that are very closely adjacent to yours.

And your product gives you tremendous leverage into moving into those markets.

So it's very hard for even an existing company that's successful to move into doing new things.

But sometimes your existing product gives you the capability and the leverage, the assets to do that.

And so if you think about like the classic example would be with Microsoft, when you think about the synergy that that windows gave them into winning sort of the office productivity space, classic adjacency probably doubled the value of the company.

If you think about companies like Facebook, when you think about the power of the social graph, the leverage, the opportunities, the option value that that gives them to move into closely related spaces, it's very powerful.

That's what makes, I think, a company go from a billion to 10 billion or 100 billion, is that there's a lot of options for the company to move into adjacent markets and expand what they're doing.

You know, that's kind of what I run through when an entrepreneur shows me their product or pitches me their idea.

And I think, you know, it drives, you know, other investors may not have this framework quite this formalized but I

think a lot of these are factors in their thinking as well.

So I'm going to end with sort of this question, and I'm going to open it up to you guys to ask questions.

And I think 1 of the really key things was that PayPal innovated not just on product, but on distribution as well.

PayPal was 1 of the first products to use a viral strategy.

So you could email money to somebody even if they didn't have a PayPal account.

And then they would get an email saying, click here to get your money.

And then when they click, they would sign up.

And so the product was sort of viral from day 1.

We were 1 of the first products to use a platform strategy.

So this is really before the days before web platforms existed.

You know, we, eBay, we kind of turned eBay into an involuntary platform for our applications.

kind of bootstrap ourselves off of an existing platform, which is a great tactic

You go somewhere where the users already are.

And in this case, PayPal was able to get this kind of explosive growth by bootstrapping off of eBay.

They didn't like the fact that we were this application on their platform.

I think, but remember, this was in like the early 2000s.

I think circa 2006, Facebook changed everything by launching a platform for web apps.

And I think that changed the psychology of the whole industry.

And big web companies started thinking of themselves as platforms or potential platforms, and that therefore, derivative activity or applications was actually something to be encouraged, not suppressed.

whole host of platforms for you to choose from in terms of getting bootstrapped

that are gonna be much more sort of friendly

to your application than sort of eBay was to PayPal before we ultimately sold the company to them.

And then I think the third sort of tactic that we used, and this sort of goes along with the second 1, is we were 1 of the first companies to use embed.

So you could actually embed a PayPal payment logo or payment form on your website or auction, and that would drive users back to PayPal.

And again, this is very commonplace today.

the early 2000s, this was a really new technique.

And It was 1 that I think some other PayPal mafia companies were able to

use very effectively, most notably YouTube.

So if you think about the way that YouTube embedded videos on MySpace and other sites in the early days, and that's what really rocketed it, that was a technique that was sort of pioneered at PayPal.

you know, again, all of these techniques today are commonplace, but in the early 2000s,

we were 1 of the first companies to do that.

And I think, Again, that innovativeness that we were innovating not just on product but on distribution as well is something that all the PayPal mafia companies have done.

I mentioned that there were about 220 sort of pre-IPO PayPal people here in management and they produced 7 sort of post-PayPal unicorns.

If you look at a company like Google, which has something like 20, 000 employees, literally 100 times more employees, There aren't 7 sort of unicorns created by ex-Googlers.

And it's a really interesting question why.

I think there's maybe 1 or 2 sort of ex-Google unicorn type companies,

even though they had 100 times more employees.

And I think this sort of scrappiness around distribution is a big part of the explanation.

When you work at a big company, distribution is guaranteed.

Google already has hundreds of millions of users.

And so when you think about creating a product at Google, I mean, Google understands hits and misses.

I mean, they understand good products versus bad products.

But the 1 thing they really don't have to pay tremendous attention to is this problem of You're an entrepreneur working in a small team with very few resources, right?

I mean, the 1 thing they have are tons of resources, tons of users.

And you've got to figure out from 0, how do I get my first user?

How does that go to 100, then 1, 000, then a million?

They've got guaranteed distribution of half a billion users.

And so I think that scrappiness about distribution is 1 of the key reasons that

there's been sort of so many kind of PayPal mafia companies.

I think it's an interesting thing to think about as you guys create your

Sure, So the question was about embed strategy.

So an embed is a simple little line of JavaScript that some third party can embed in their site, or their blog, or their eBay auction.

And what PayPal did is we gave people that little snippet of code.

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David Sacks on Unicorn Ideas: What Elements Are Needed to Create a Billion Dollar Success?