Kevin Hale, a partner at Y Combinator, explains how investors think about startup ideas. He emphasizes the importance of starting with a problem rather than a solution. He suggests using a formula to determine the potential market size and the price needed to reach a billion-dollar valuation. Investors consider beliefs about the founders, market, product, and acquisition strategy. The default belief is that founders can build their product, but the "special sauce" is what sets them apart. Communication skills and storytelling ability are crucial for biotech startups. Overall, founders should focus on identifying problems and considering the beliefs necessary for their idea to become a billion-dollar company.

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A lot of founders ask me How do I know if my idea is going to be interesting to an investor?

So today I'm going to talk about how investors think about ideas.

So every startup idea Usually is composed of 3 parts.

There's the problem, there's the solution, and then there's an insight.

And these are usually the things I'm looking for.

The most common problem that a lot of founders make is that they start here at the solution and this ends up being a thing that I'm always looking out for because It creates a situation that we call at YC a solution and search of a problem And this is usually 1 of the biggest mistakes that a lot of founders make, is that I'm interested in some really cool tool or technique or trend, like I'm interested in machine learning, I'm interested in the blockchain, and what they try to say is like, I wanna do this thing, and then they try to then start at the solution and then eventually try to shoehorn a problem and maybe they don't even end up having an insight.

The best way to actually create a startup idea is to start with a problem.

Once I understand what the problem is, I have a good understanding when I'm looking at an idea of who the customer is and also how big the potential market is.

And there's kind of an easy formula for figuring this out.

What I'm trying to imagine is what would it take for this company to be a billion dollar business and you can usually do this with a math formula.

So a really quick shorthand is to try to figure out, okay, what is it going to take for this company to make a hundred million dollars a year?

Let's just assume that a valuation of a billion dollars is going to be 10x the multiple of a revenue.

So the question becomes, ok, what do I have to fill out on the other side of this equation to get to this number?

And it's always going to be the price that I charge for this product.

And let's say it's a consumer product where the lifetime value is like $100 then the answer is I need 1 million users or customers in order to get to this idea.

Now soon as I look think about this equation I start thinking about these 2 things.

1, do I believe that people will pay $100 and do I believe that there's a million people out here who will pay this amount?

And so it really becomes 1 of these questions.

Like I start here and then I have to think about, okay, what do I have to believe for this equation to be true?

And there's 4 types of beliefs that I'm thinking about at any given time.

I'm thinking about what do I have to believe about the founders for this to be true, what do I have to believe about the market for this to be true?

What do I have to believe about the product for it to be true?

And what do I have to believe about their acquisition strategy for it to be true?

This is something that you typically see in a consumer startup.

Down the road, you might see other values, where it's $10K and $100K.

So at these prices, now we're getting into, are they small businesses, these are luxury items, etc.

And then I'm thinking, okay, what is the customer segment look like?

And these will change to sort of a hundred K, 10 K, and then 1 K.

And so now I'm trying to figure out, it's like, have they figured out how to find these people and do I believe that they can ask for these prices?

And so at this question I'm looking at the founders, it's like, What I have to believe about the founders is can they sell a product worth $100,000?

Does the market support this kind of product?

And that usually means is that if someone's paying this, they're thinking the value of the product is worth many, many multiples times this.

Therefore, that's why they're willing to pay it.

The product usually is that the product just works as a default, but sometimes it's like if I build a product that's 10x, something like this could happen.

And then acquisition is 1 of the big ones that usually I'll end up asking a ton of questions to verify.

Has this person figured out understanding their costs?

Do they understand how to get them profitably, etc.?

The thing about these 4 things I need to believe in order to believe that this equation is true is there's 2 types of beliefs.

There's the default belief, and then there's probably something I call the special sauce.

Let's say I'm talking to a biotech startup.

The default belief is that they can make whatever thing that they can build or create or sell to whether it's a pharma company or like to customers etc.

Like them being able to build it is the default.

I actually do not spend a lot of time trying to figure out if founders can do that.

There's some basic threshold things, but to me it's like if they can't even do that, they'll never get off the ground.

Usually the trick to getting to be a billion dollar company is that they have something else.

And so the extra things, let's say for a biotech farmer, is like, are they good at storytelling?

Like, are they going to be able to tell the story of their company and explain whatever it is that they make in a way that investors will give them a lot of money to either get through FDA approval or to bring their product to market, et cetera.

And so that is usually the thing that I need to believe in.

Because if I believe that these biotech founders are not able to communicate well and don't have good social skills, then to me I feel like they don't have what it takes to fill in this equation and become a billion dollar company.

So when you're thinking about your ideas and trying to figure out which ones to work on, try to think about the start with the problem and figure out what would it take for it to be a billion-dollar company and then ask yourself what are the things that you'd have to believe in 4 categories yourself as a team or founders, the market, the product, and acquisition strategy, that if I believe those 4 things and that you


Speaker 0: Hi, my name is Kevin Hale. I'm a partner here at Y Combinator. A lot of founders ask me How do I know if my idea is going to be interesting to an investor? So today I'm going to talk about how investors think about ideas. So every startup idea Usually is composed of 3 parts.

There's the problem, there's the solution, and then there's an insight. And these are usually the things I'm looking for. The most common problem that a lot of founders make is that they start here at the solution and this ends up being a thing that I'm always looking out for because It creates a situation that we call at YC a solution and search of a problem And this is usually 1 of the biggest mistakes that a lot of founders make, is that I'm interested in some really cool tool or technique or trend, like I'm interested in machine learning, I'm interested in the blockchain, and what they try to say is like, I wanna do this thing, and then they try to then start at the solution and then eventually try to shoehorn a problem and maybe they don't even end up having an insight. The best way to actually create a startup idea is to start with a problem. Once I understand what the problem is, I have a good understanding when I'm looking at an idea of who the customer is and also how big the potential market is.

And there's kind of an easy formula for figuring this out. What I'm trying to imagine is what would it take for this company to be a billion dollar business and you can usually do this with a math formula. So a really quick shorthand is to try to figure out, okay, what is it going to take for this company to make a hundred million dollars a year? Let's just assume that a valuation of a billion dollars is going to be 10x the multiple of a revenue. So the question becomes, ok, what do I have to fill out on the other side of this equation to get to this number?

And it's always going to be the price that I charge for this product. And let's say it's a consumer product where the lifetime value is like $100 then the answer is I need 1 million users or customers in order to get to this idea. Now soon as I look think about this equation I start thinking about these 2 things. 1, do I believe that people will pay $100 and do I believe that there's a million people out here who will pay this amount? And so it really becomes 1 of these questions.

Like I start here and then I have to think about, okay, what do I have to believe for this equation to be true? And there's 4 types of beliefs that I'm thinking about at any given time. I'm thinking about what do I have to believe about the founders for this to be true, what do I have to believe about the market for this to be true? What do I have to believe about the product for it to be true? And what do I have to believe about their acquisition strategy for it to be true?

This is something that you typically see in a consumer startup. Down the road, you might see other values, where it's $10K and $100K. So at these prices, now we're getting into, are they small businesses, these are luxury items, etc. And then I'm thinking, okay, what is the customer segment look like? And these will change to sort of a hundred K, 10 K, and then 1 K.

And so now I'm trying to figure out, it's like, have they figured out how to find these people and do I believe that they can ask for these prices? And so at this question I'm looking at the founders, it's like, What I have to believe about the founders is can they sell a product worth $100,000? Does the market support this kind of product? And that usually means is that if someone's paying this, they're thinking the value of the product is worth many, many multiples times this. Therefore, that's why they're willing to pay it.

The product usually is that the product just works as a default, but sometimes it's like if I build a product that's 10x, something like this could happen. And then acquisition is 1 of the big ones that usually I'll end up asking a ton of questions to verify. Has this person figured out understanding their costs? Do they understand how to get customers? Do they understand how to get them profitably, etc.?

The thing about these 4 things I need to believe in order to believe that this equation is true is there's 2 types of beliefs. There's the default belief, and then there's probably something I call the special sauce. Let's say I'm talking to a biotech startup. The default belief is that they can make whatever thing that they can build or create or sell to whether it's a pharma company or like to customers etc. Like them being able to build it is the default.

I actually do not spend a lot of time trying to figure out if founders can do that. There's some basic threshold things, but to me it's like if they can't even do that, they'll never get off the ground. Usually the trick to getting to be a billion dollar company is that they have something else. And so the extra things, let's say for a biotech farmer, is like, are they good at storytelling? Like, are they going to be able to tell the story of their company and explain whatever it is that they make in a way that investors will give them a lot of money to either get through FDA approval or to bring their product to market, et cetera.

And so that is usually the thing that I need to believe in. Because if I believe that these biotech founders are not able to communicate well and don't have good social skills, then to me I feel like they don't have what it takes to fill in this equation and become a billion dollar company. So when you're thinking about your ideas and trying to figure out which ones to work on, try to think about the start with the problem and figure out what would it take for it to be a billion-dollar company and then ask yourself what are the things that you'd have to believe in 4 categories yourself as a team or founders, the market, the product, and acquisition strategy, that if I believe those 4 things and that you

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