- The video is about evaluating startup ideas and the challenges faced by entrepreneurs.
- The curriculum of the last startup school was too advanced for many participants, who had trouble choosing which idea to pursue.
- The video emphasizes the importance of having conviction and knowing the beliefs that would make someone quit their job to work on a startup full-time.
- Evaluating a startup idea is important for deciding whether to pivot or pursue a different idea.
- Y Combinator (YC) is often perceived as only funding startups with significant traction, but there are examples of companies that were accepted with just an idea.
- The video discusses the role of YC in helping founders develop their startup narratives and how investors evaluate startup ideas.
- A startup idea is a hypothesis about why a company can grow quickly, and it should be constructed in a way that demonstrates this potential growth.
- The video provides tips for talking about the problem, solution, and insight behind a startup idea.
- Good problems are popular, growing, urgent, expensive to solve, mandatory, and frequent.
- The video also mentions the importance of triggers to change behavior and the ideal characteristics of problems that give opportunities for conversion.
- Ideal problems have millions of users, are growing at a rate of 20% per year, are urgent, and have high costs.

- Problems that cost a lot of money and require solving multiple times a day are ideal for startups.
- It is advised to start with a problem rather than a solution, as it is more efficient and likely to result in growth.
- An unfair advantage is necessary for investors to choose a startup, and there are five types of advantages: founder, market, product, acquisition, and monopoly.
- Paid acquisition is not a sustainable growth strategy, and word-of-mouth is preferable.
- Beliefs about a company can be divided into threshold beliefs (basic requirements) and miracle beliefs (potential for success).
- Sales ability is crucial for success, especially in B2B or enterprise startups.

- The speaker discusses their work with various companies, focusing on proving a concept rather than developing a product.
- They use Y Combinator (YC) as an example, highlighting how it solved the problem of founders needing connections to raise money by investing in companies through an open application process.
- YC had unfair advantages such as knowledgeable founders, the belief in technology companies' potential, and the ability to make more bets due to lower costs.
- The speaker also mentions the acquisition of YC and the growth of its alumni network, which added value over time.
- Another example is given with Wufoo, an online form and survey builder that solved the problem of needing coding skills to collect data by offering a drag-and-drop visual editor.
- Wufoo's market was vast and its product was faster and cheaper than competitors, leading to an acquisition and widespread use.
- The speaker emphasizes the importance of understanding the problem, solution, and unfair advantage in a startup idea, and the need to prove and test hypotheses through user feedback.

The video discusses evaluating startup ideas and the challenges faced by entrepreneurs. It emphasizes the importance of having conviction and knowing the beliefs that would make someone quit their job to work on a startup full-time. Y Combinator (YC) is mentioned as a funding source for startups, and the video provides tips for talking about the problem, solution, and insight behind a startup idea. It also highlights the importance of having an unfair advantage and the role of sales ability in B2B or enterprise startups. The speaker gives examples of YC and Wufoo to illustrate these concepts and emphasizes the need to prove and test hypotheses through user feedback.

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

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

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

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Topics

0.00 - Why we're starting with evaluating ideas

1:25 - YC doesn't just fund companies with traction

2:50 - How can I predict if an investor will like my idea?

5:15 - A startup idea is a hypothesis

6:55 - The problem

10:55 - The solution

12:35 - The insight

14:00 - Founder's unfair advantage

15:00 - Market growing 20% a year

15:40 - Product 10x better

16:30 - Acquisition model

17:55 - Monopoly

18:50 - Threshold belief

19:10 - Miracle belief

20:10 - Example: YC

23:20 - Example: Wufoo

Okay, so This is how to evaluate startup ideas and this is actually a new Set of content that we've developed Based on a lot of feedback that we saw from the last startup school and what we noticed is a lot of people's challenges so last year's curriculum actually had a lot of content that ended up being when we looked at the data for who's participating in startup school was like, oh, this is much more advanced.

A lot of people, for instance, like I had no idea, or like they have too many ideas that they don't know which 1 to pursue.

It was a main reason why a lot of people are only able to work on their startup sometimes part-time.

Yes, they might be stuck without resources, but they didn't have conviction.

They didn't know like, Oh, what would I have to believe in order to say like, I want to quit my job?

This is also a really great skill to have, because if you are realizing you need to pivot, how do you evaluate if you need to do that?

And then also, if you're pivoting to something else, how do you evaluate whether something is worth going to?

And if you already have a launch company, then you might have problems with like, why isn't this growing?

And evaluating your startup, especially in the way that sort of investors evaluate startups ideas, we find is going to be really, really useful.

There's this myth about Y Combinator is that people think YC only funds companies who have tons and tons of traction.

That nowadays the only way to get into YC is you have to have lots of revenue or tons of users already.

And part of that has to do with the press and then the exposure of the companies that make it to demo day.

But that being said, there's lots of great examples of companies who actually got accepted just with an idea.

And so Zenefits is a really good classic 1.

Parker was a single, non-technical founder who pitched an idea to YC, and he got in that way.

So technically, they were forced to pivot right away.

So they hadn't written a single line of code.

And then my experience in YC is actually exactly the same.

So when I founded Wufoo and we entered that second batch, we also had not written a single line of code.

PG had invested us at just the idea stage.

And so I feel fully committed now as a partner to always be trying to find and dedicate time and energy to funding companies who are just at the idea stage.

A lot of our efforts here for working on Startup School is to help us, help you work on how to talk and think about your startup.

And that if we can fix that, it can help you sort of inspire us to be like, oh, yay, I can believe in what you're doing.

And a lot of times, founders get in the way when they're telling their narrative.

So how can I predict if an investor will like my idea?

That's ultimately what I'm trying to figure out.

And so for Us at YC, the definition of a startup is a company that is designed or created to try to grow very quickly.

So if you're not trying to build a company that grows very, very fast, then you're just building a normal company.

And there's nothing wrong with that, but These companies are the ones that investors are interested in so if you're looking to build something That will have tons of users that will have huge valuations I'll be able to attract venture funding then the evidence that we want is evidence that shows that your company can grow quickly.

If you ever meet me or talk to me about your startup and kind of recruiting or at 1 of these events, I will never tell you that I do not like your idea.

It is not to be nice to you, it is not to blow smoke up your ass.

I learned this way of thinking from Paul Graham.

He says like, look, the average investor or a lot of the investors that you see, when you talk to them about your idea, it feels like they're trying to poke holes in your idea.

They're trying to figure out what's wrong with it, and then they're like trying to show, sometimes just how smart they are.

And he explained that his job and the way he sees our work at YC is that it's not to figure out what's wrong with the company, but to figure out how it could possibly win.

Because our bets, the ones that win, are the ones that are non-obvious.

And so for us to figure out the non-obvious stuff, it's going to not sound obvious when they first tell you.

And so we have to work on our imagination.

We have to work on our optimism to figure out.

Oh, what is the way that whatever story that they're telling me Could become a billion-dollar company and then a great investor pitches that back to the founder I Figure out all the ways that I think whatever you're doing could possibly become big, and then I'm trying to convince you that this is what needs to happen so that I would have the evidence or that you will be on the right path to having a company that grows quickly.

A startup idea is basically a hypothesis, and this is the way you should think about it.

It's a hypothesis about why a company could grow quickly.

And your job is to figure out how to construct your hypothesis, basically the pitch, to the investor so they understand how it can grow quickly.

A lot of times people make the mistakes of trying to just accurately describe or over describe a lot of different parts.

So just like a normal hypothesis has a pretty decent structure for this.

This will hopefully help you sort of workshop, like understanding, oh, this is exactly all the reasons why this should succeed.

And so even before we start even building anything, we can have an understanding of like, oh, here's the potential path of this company, or here's the things I need to prove to show that this company could do well.

The first part is a problem, and it's basically the initial conditions.

You have to explain to me, like, what is the setting for this company that allows it to be able to grow quickly?

So this is basically, what is the experiment that you're basically running within those conditions for it to grow really quickly.

So what's your explanation why the thing that you're going to try, your experiment, is going to end up being successful?

Those are the 3 components that I'm always trying to figure out when I'm listening to someone's pitch.

Here's a tip for talking about the problem, or to know whether your problem, your initial conditions, are correct.

The first is, good problems, they're popular.

You want to avoid problems that there's a small number of people that have it.

So therefore the market basically like is it growing at a rate that like more and more people are going to be having the problem and it's it's growing faster than other people's or other types of problems.

We like problems that are urgent, ones that need to be solved very, very quickly.

We like problems that are really expensive to solve, because if you're able to solve it, then you can charge a lot of money potentially.

We like problems that are mandatory, right?

So therefore, it's like, ugh, people have this problem and they have to solve it.

And then we like problems that are frequent, ones that people are gonna encounter over and over and over again, and often in a frequent time interval.

So what you want to have is like some aspect of the problem that you're working on, at least 1 of them, and it's ideal if you have multiple of them.

You don't have to have all of them, but it's 1 of those things where it's like if your company isn't growing or if someone's not as excited about the problem, it's probably missing some of these characteristics.

The last 1 about frequency is super important because I like problems and you'll find a lot of other YC partners like problems a lot, that gives people a lot of opportunities to convert.

Fogg, he's a researcher at Stanford, and he tosses this formula up all the time.

And he says basically, if you're trying to change someone's behavior, you have 3 things you need to have in place.

You need to have the motivation, the ability, and the trigger.

They need to all happen at the same time.

So the motivation is like, I have this problem I need to solve, whatever it is.

What's gonna be the thing that gets them to all of a sudden realize, oh, I need to solve it with your thing?

And so a lot of companies will have like, oh, I built something, but for some reason no one's signing up.

Or like they're not using it, they're not engaged, I have no retention.

And a lot of the times it's because it's like you're hoping that they will somehow just remember on their own that they have the problem and to start using you.

And oftentimes most companies don't send enough, for example, email notifications, or triggers, or reminders, or figure out ways to come back into the app, or figure out ways to be back in front of the user at the right time.

And if you can't figure out those opportunities, it's really hard to get people to switch over to using your solution, service, or product.

So our ideal problems are millions of users.

That's why people like to work on consumer companies.

That's why some investors like to focus on them.

We like markets that are growing 20% a year.

We like problems where people are trying to solve it right now, immediately.

We like problems that just cost a ton of money, so billions of dollars, right?

Or at least they all add up to some billion dollar total addressable market We like problems where the law has changed The law has changed and regulation is put up there and now people have to solve a bunch of problems You saw a ton of health care problem health care startups were born after Affordable Care Act was passed.

And a lot of that had to do with, there was now all of a sudden opportunity.

This problem that all these hospitals and clinics had to solve.

And Then we like problems that people need to solve multiple times a day, or we'll use it multiple times a day Facebook's a good classic example, but people also really love slack right because it's like oh I'm gonna be engaged and using it multiple times a day during the workday.

So there's pretty much only 1 piece of advice I really have for the solution.

That's the best advice that you can ever follow, and that is don't start here.

So what I mean by that is at YC we have an acronym for a problem that we try to avoid or basically an application that we have to go like oh man I wish they had started with the problem first and we call it SISP.

It means solution and search of a problem.

And often what happens is you're an engineer, you're excited about technology, some new technology has come on the scene.

Let's say it's React Native or whatever the new thing is.

And you're like, I want to build something with this.

It's a large reason why you start working on a solid project.

And then you go like, OK, what kind of problem can I solve now?

And then you try to shoehorn a problem into the solution.

And what ends up happening is that's a much more difficult way to grow the company.

It's not impossible for companies to grow this way, but it's super inefficient.

It's much better to be like, let me see what problems people have, and then I will use whatever is necessary to solve them.

And therefore, it's much more likely that you will grow as a result.

Because the other way around is you might have to go and try to drum up the problem, or you have to like brand a problem as something that people have.

And it's so much more difficult, and you end up growing much more slowly as a result.

So look at what you're building right now or look at the reason why you're trying to do this startup and is it because you only care about the technology and building something in that or have you started with a problem you go like I'm gonna do whatever it takes to solve people, users, customers' issues.

What's the reason why this solution is going to work?

And this is where a lot of companies get tricked up.

Because it's really about, what is your company's unfair advantage?

Why are you going to win versus everyone else?

Why are you going to be the fastest 1 to grow?

Because that insight is what's needed for the investor to choose you over anyone else.

You have to have an unfair advantage that explains why you're going to grow quickly.

If it's not related to that, then it's not going to be something that an investor is going to find valuable.

You can't just be like I have a problem, I'm solving it, and have no explanation why.

Without that last sort of explanation, I can't use my imagination.

I can't evaluate just solely on how well you've thought through this problem.

And so let's go through the types of unfair advantages that your company have.

So there's 5 different types, and companies do not have all of them.

Really great ones, not surprisingly, will have all of them.

But you want at least 1, and it's nice if you can have 2 or 3.

But for most of you, it's probably just 1.

So the first 1, so How do you know if you have a founder unfair advantage?

And so all of these will be connected to numbers, actually, which will help us make this really easy.

Are you 1 in 10 of all the people in the world who can solve this problem?

And 99% of the people we fund at YC do not fall into that category.

And so if you think, well, I'm a product manager at Google.

There's a lot of product managers at Google.

If you say you're an engineer at Microsoft, there's a lot of engineers at Microsoft.

It's like, great, but it's not 1 that will make me think, oh, you have a greater unfair advantage than someone else.

If you've done a PhD, and let's say you've done it on some kind of crazy biotech research and you have like a special patent To be able to cure some kind of disease then you have a founder advantage Your market is it growing 20% a year like By default if you just build the solution in the space, you should just automatically grow because you're just following a trend If this is your only company advantage, then it's 1 of the weakest ones that you could have.

It is great to be in that space, but you want to have something in addition to this.

Like, you're going to do better than average because you've picked the right problem space and the right set of customers that want your problem.

But Again, if you're in a market that is stagnating or shrinking, then you're going to have investors worried about the long-term viability of your company as a result.

Is your product 10x better than the competition?

If it is, then you potentially have an unfair advantage.

Someone should be able to look at your product and go like, oh shit, this is so much better than everything else I've ever seen.

It is 10x faster, it is 10x cheaper, et cetera.

And if it's not an order of magnitude, let's say it's just like 2x or 3x.

Again, that's nice, but it's not enough for an investor to go like, oh, this is a slam dunk.

In regards to that 10x product and showing that you are able to have that.

Later in startup school, we're gonna do a lecture on pricing and we'll talk things about cost and value and that'll help you sort of better understand it's like, oh, how to better prove out that 10x multiple using sort of metrics and numbers and pricing.

So, a lot of people think that if you go to investor and you've done a bunch of Facebook or Twitter or Google ads and you show your CAC and LTV that you were able to prove that you have a sustainable sort of acquisition model.

And I want you to know that if paid acquisition is the only way that you are able to grow your company, then I'm going to discount that channel of growth greatly.

That is because if you actually get really popular, you can actually start being someone significant, let's say becoming a $100 million revenue company, then you're gonna attract a lot of competitors into space.

And that advantage is gonna quickly dwindle over time.

Blue Apron is a really good example of this.

Almost all their acquisitions have been paid, and then once they ate through that there's almost nowhere else for them to sort of go.

You want to find acquisition paths that cost no money and my favorite companies, the ones that become really great are the ones that can grow by word of mouth.

This is a good percentage of the way they grow.

And so in the early days of your startup, if you don't have any money, that's actually a very great way of exercising, how do I grow this without having to pay for it?

And so In the beginning, we tell you to do things that don't scale.

But this is what you sort of want to accomplish.

It's like, do I have an advantage that is free?

And the last 1 is, do you have a monopoly?

And so we don't mean this in the monocle, monopoly game sense.

So we made it as like, as your company grows, is it more difficult for you to be defeated by competitors?

And so, good examples of that are like, companies with network effects and marketplaces.

Where marketplaces where it tends to be a winner takes all.

And network effects is just basically as my network grows, the strength of my company and the value of the product or service also grows with it.

But when you do have that, it works out great.

There's something to keep in mind also, as other things I'm looking to believe about a company.

And That is something that trips up a lot of founders.

And so there's 2 types of beliefs that I have about a company.

And so there's the threshold belief, which is like, what's the default?

So oftentimes, for me, it's like, oh, them building it.

If they can't even build it, none of it even matters.

And so, to me, that question is not the most important.

What will determine whether I'm gonna win the lotto is a miracle belief, that like, oh my God, if I believe that they can do this, they're actually going to be able to take off really well.

So if you are a heavy engineering team or doing a BDB or enterprise startup, Again, the default is you have to build it.

So if you can't even build it, then it's not even gonna work.

So I don't spend actually a lot of time looking at that.

For me, I'm trying to figure out, success will be determined by how well you can do sales.

How well you can tell the story, how well you can actually convince customers and work through a sales process.

I want evidence that shows that you know how to work through that and make that happen.

And so all of my work with most of those companies is like not working on 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 shit, they have this super combo.

So YC is a good 1 because we like to think of YC as a startup.

So the problem, the way we'd word this is, it's hard for founders to raise money without knowing someone in venture capital.

So at the time it was started, you basically had to be an insider.

And it was The only way you can sort of get money.

And the solution that basically Paul Graham came up with is like investing companies through an open application.

And that should be enough for you to get funding.

Now, there's a bunch of unfair advantages that YC had.

Number 1, the founders were pretty incredible.

So Paul Graham had wrote a textbook on Lisp.

And they had built and sold the first SaaS company that was via web to Yahoo.

So they were kind of experts at both evaluating technology and also understanding startups and that whole process.

The market, basically believe that future billion dollar companies would be technology companies.

They'd be powered by software, and the wonderful thing about tech companies, especially At that time was Moore's law was making it cheaper and cheaper for software companies To be started and they further needed a whole lot less money, and he could make a lot more bets as a result the product so basically you know They pay the founders that come for 3 months they get some advice they work on their product for a relatively small amount of money, and then at the end of the time, instead of offering co-working space, they work from their own home and then they pitch to a bunch of different investors.

And the idea was like that would be so valuable to a potential founder who had no connections that it would attract a lot of really great minds or a lot of people who are hungry to get into the space.

The acquisition, so most people don't realize this, is like, PG was able to sort of build up YC and attract the right talent because he had a huge reach or audience when he got started.

He had written that textbook, yes, but he also wrote all these popular online essays and had a large audience of his target users, hackers, to come and evaluate his product.

And you can acquire them relatively cheaply just by making a website and letting it be known.

And then the last 1 is something he didn't even realize when he started YC.

And that is that as the YC alumni network grew, it got more powerful and more valuable over time.

The results are funded to 1,000 companies.

They're the CEOs of some of the biggest companies in the world, they are over 15 companies worth over a billion dollars.

There's 93 companies worth over 100 million dollars, and our total market capitalization is over 100 billion dollars.

I'm gonna do 1 more example with you guys.

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Kevin Hale - How to Evaluate Startup Ideas