Lecture Transcript: http://tech.genius.com/Sam-altman-lecture-1-how-to-start-a-startup-annotated

Sam Altman, President of Y Combinator, and Dustin Moskovitz, Cofounder of Facebook, Asana, and Good Ventures, kick off the How to Start a Startup Course. Sam covers the first 2 of the 4 Key Areas: Ideas, Products, Teams and Execution; and Dustin discusses Why to Start a Startup.

See the slides and readings at startupclass.samaltman.com/courses/lec01/

Discuss this lecture: https://startupclass.co/courses/how-to-start-a-startup/lectures/64030

This video is under Creative Commons license: http://creativecommons.org/licenses/by-nc-nd/2.5/

Maybe we can get a bigger auditorium, we'll see.

I'm Sam Altman, I'm the president of Y Combinator.

9 years ago, I was a Stanford student, and then I dropped out to start a company and then I've been an investor for the last few.

So at YC we've been teaching people how to start startups for 9 years.

Most of it's very hands on and specific to the startups.

But 30% of it is pretty generally applicable.

And so we think that we can teach that 30% in this class.

And even though that's only 30% of the way there, hopefully it'll still be really helpful.

this at YC already, but it's all been off the record.

And this is the first time that a lot of what we teach in YC is going to be on the record.

So we've invited some of our best speakers to come and give the same talks they give at YC.

And so we're pretty sure that a lot of this advice is pretty good.

We can't fund every startup yet, but we can hopefully make this advice very generally available.

Guest speakers are gonna teach 17 of the 20 classes.

Counting YC itself, every guest speaker has been involved in the creation of a billion plus dollar company.

So the advice shouldn't be that theoretical.

It's all been, it's all from people who have done it.

All of the advice in this class is geared towards people starting a business where the goal is hyper growth.

And eventually building a very large company.

Much of it doesn't apply in other cases, and I want to warn people up front.

That If you try and do these things in a lot of big companies or non-startups, it won't work.

I, I really do think that startups are the way of the future, and it's worth trying to understand them.

But startups are very different than normal companies.

So over the course of today and Thursday, I'm going to try to give an overview of the 4 areas that you need to excel at in order to maximize your chances of success at a startup.

And then throughout the course, the guest speakers are going to drill into all of these in more detail.

So the 4 areas, you need a great idea, a great product, a great team, and great execution.

These overlap somewhat, but I'm going to have to talk about them somewhat individually to make it make sense.

The outcome is something like idea times product, times execution, times team, times luck.

Where luck is a random number between 0 and 10, 000, literally that much.

But if you do really well in the 4 areas you can control, you have a good chance at at least some amount of success.

1 of the exciting things about startups is that they are surprisingly even playing field.

Young and inexperienced, you can do this.

Old and very experienced, you can do this too.

And 1 of the things that I particularly like about startups is that some of the things that are bad in other work situations, like being poor and unknown, are actually huge assets when it comes to starting a startup.

Before we jump in on the how, I want to talk about why you should start a startup.

I'm somewhat hesitant to be doing this class at all, because you should never start a startup just for the sake of doing so.

There are much easier ways to get rich, and everyone who starts a startup always says, always, that they couldn't have imagined how hard and painful it was going to be.

You should only start a startup if you can feel compelled by a particular problem, and that you think starting a company is the best way to solve it.

The specific passion should come first, and the startup second.

In fact, all of the big successes we have at YC followed this.

So, for the second half of today's lecture, Dustin Moskowitz, the co-founder of Facebook and Asana, is going to take over and talk about why to start a startup.

We're so surprised by the amount of attention that this class got, that we want to make sure we spend a lot of time on the why.

Okay, so the first of the 4 areas, a great idea.

It's become popular in recent years to say that the idea doesn't matter.

In fact, it's almost uncool to spend a lot of time thinking about the idea for a startup.

You're just supposed to start, throw stuff at the wall, see what sticks.

And not even spend any time thinking about if it'll be valuable, if it works.

Things do evolve in ways that are difficult to predict.

And there's a limit to how much you can figure out without actually getting a product in the hands of users.

And great execution is at least 10 times more important and a hundred times harder than a good idea.

But the pendulum has swung way out of whack here.

In the pivot happy world that we're in today feels really suboptimal.

Great execution towards a terrible idea will get you nowhere.

There are exceptions, of course, but most great companies start with a great idea, not a pivot.

If you look at successful pivots, they almost always are a pivot into something the founders themselves wanted, not a random made up idea.

Airbnb happened because Brian Chesky couldn't pay his rent, but he did have some extra space.

In general though, if you look at the track record of pivots, they don't become big companies.

I myself used to believe ideas didn't matter that much.

The definition of the idea as we talk about it is very broad.

It includes the size and the growth of the market.

The growth strategy for the company, the defensibility strategy and so on.

When you're evaluating an idea, you need to think through all these things, not just the product.

If it works out, you're going to be working on this for 10 years.

So it's worth some real up front time to think through the long term value and the defensibility of the business.

Even though plans themselves are worthless, the exercise of planning is really valuable and totally missing in most startups today.

Long term thinking is so rare anywhere, but especially in startups, that it's a huge advantage if you do it.

Remember that the idea will expand and become more ambitious as you go.

You certainly don't need to have everything figured out in a path from here to world domination, but you really want a nice kernel to start with.

You want something that can develop in interesting ways.

As you're thinking through ideas, another thing that we see young founders get wrong all the time, is that someday, you need to build a business that's difficult to replicate.

This is an important part of a good idea.

I want to make this point again because it's so important.

The idea should come first and the startup should come second.

Wait to start a startup until you come up with an idea you feel compelled to explore.

This is also the way to choose between multiple ideas.

If you have several ideas that all seem pretty good, work on the 1 that you think about most often when you're not trying to think about work.

But we hear again and again from founders that they wish they had waited to start a startup until they came up with an idea that they really loved.

Another way of looking at this is that the best companies are almost always mission oriented.

It's difficult to get large groups of people to the extreme levels of focus and productivity that you need for a startup to be successful, unless the company feels like an important mission.

And it's usually really hard to get that without a great founding idea.

A related advantage of mission oriented ideas is that you yourself will be dedicated to them.

It takes years and years, usually a decade to create a great startup.

If you don't love and believe in what you're building, you'll likely to give up at some point along the way.

There's no way I know of to get through the pain of a startup without belief that the mission really matters.

A lot of founders, especially students, believe that their startup's only going to take 2 or 3 years, and then after that they'll work on what they're really passionate about.

A third advantage of mission oriented companies is that people outside the company are more willing to help you.

You'll get more support on a hard, important project than a derivative 1.

When it comes to starting startups, in many ways it's easier to start a hard startup than an easy startup.

This is 1 of those counterintuitive things.

It takes people a long time to understand.

It's difficult to overstate how important being mission driven is, so I want to emphasize it 1 last time.

Derivative companies, companies that copy an existing idea with very few new insights, don't excite people, and they don't compel the teams to work hard enough to be successful.

Paul Graham is going to talk about how to get startup ideas next week.

It's something that a lot of founders struggle with, but it's something I believe you can get better with it.

And it's definitely worth trying to get better at.

The hardest part about coming up with great ideas is that the best ideas often look terrible at the beginning.

The 13th search engine and without all the features of a web portal, most people thought that was pointless.

Search was done and Anyway, it didn't matter that much.

The tenth social network and limited only to college students with no money, also terrible.

MySpace had won and who wants college students as customers?

These all sounded really bad, but they turned out to be good.

If they had sounded really good, there would have been too many people working on them.

As Peter Thiel is going to discuss in the fifth class, you want an idea that turns into a monopoly.

But you can't get a monopoly in a big market right away.

You have to find a small market in which you can get a monopoly and then quickly expand.

This is why some great startup ideas look really bad at the beginning.

It's good if you can say something like, today, only this small subset of users are going to use my product, but I'm going to get all of them.

And in the future, almost everyone will use my product.

Here's the theme that's going to come up a lot.

And a willingness to ignore others naysaying.

The hard part is that This is a very fine line.

There's right on 1 side of it and crazy on the other.

But keep in mind that if you do come up with a great idea, most people are going to think it's bad.

This is also a reason why it's not usually dangerous to tell people about your idea.

The truly good ideas don't sound like they're worth stealing.

You want an idea about what you can say, I know it sounds like a bad idea, but here's specifically why it's actually a great 1.

You want to sound crazy, but you want to actually be right.

And you want an idea that not many other people are working on.

And it's okay if it doesn't sound big at first.

Common mistake among founders, especially first time founders, is they think that the first version of their product, the first version of their idea, needs to sound really big.

It needs to take over a small specific market and expand from there.

That's how most great companies have started.

Unpopular but right is what you're going for.

You also really want to take the time to think about how the market's going to evolve.

You need a market that's going to be big in 10 years.

Most investors are obsessed with the market size today, and they don't think

at all about how the market's going to evolve.

Most investors are obsessed with the market size today, and

they don't think at all about how the market's going to evolve.

In fact, I think this is 1 of the biggest systemic mistakes that investors make.

They think about the growth of the startup itself, they don't think about the growth of the market.

I care much more about the growth rate of the market than its current size.

And I also care if there's any reason that it's going to top out.

I prefer to invest in a company that's going after a small but rapidly growing market, than a big but slow growing 1.

1 of the big advantages of these sorts of markets, these small but rapidly growing markets, is that customers are usually pretty desperate for a solution, and they'll put up with an imperfect but rapidly improving product.

And a big advantage of being a student, 1 of the 2 biggest advantages, is that you probably have better intuition about which markets are likely to start growing rapidly than older people do.

Another thing that students usually don't understand, or at least takes a while.

You cannot create a market that doesn't want to exist.

You can basically change everything in a startup but the market.

So you should actually do some thinking to be sure, or at least as sure as you can be, that the market you're going after is going to grow and be there.

a lot of different ways to talk about the right kind of market.

For example, surfing someone else's wave or stepping into an up elevator or being part of a movement.

But all of this is just a way of saying, you want a market that's going to grow really quickly.

It may seem small today, it may be small today.

But you know, and other people don't, that it's going to grow really fast.

So think about where this is happening in the world.

You need this sort of a tailwind to make a startup successful.

The exciting thing is there are probably more of these tailwinds now than ever before.

As Mark Andreessen says, software is eating the world.

There are like so many great ideas out there.

And you just have to pick 1 and find 1 that you really care about.

Another version of this, that gets down to the same idea, is Sequoia's famous question, why now?

Why is this the perfect time for this particular idea and to start this particular company?

Why couldn't it have been done 2 years ago?

And why will 2 years in the future be too late?

For the most successful startups we've been involved with, they've all had a great idea, great answer to this question.

And if you don't, you should be at least somewhat suspicious about it.

In general, it's best if you're building something that you yourself need.

You'll understand it much better than if you have to understand it by talking to a customer to build the very first version.

If you don't need it yourself, and you're building something that someone else needs, realize that you're at a big disadvantage and get very, very close to your customers.

Try to work in their office if you can, and if not, talk to them multiple times a day.

Another somewhat counterintuitive thing about good startup ideas is that they're almost always very easy to explain and very easy to understand.

If it takes more than a sentence to explain what you're doing, it's almost always a sign that it's too complicated.

It should be a clearly articulate, articulated vision with a small number of words.

And the best ideas are usually either very different from existing companies in 1 important way, like Google being a search engine that worked just really well, and none of the other stuff of the portals, or totally new like SpaceX.

Any company that's a clone of something else that already exists, with some small or made up differentiator, Like we're going to be X, beautiful design, or we're going to be Y for people that like red wine instead.

So as I mentioned, 1 of the great things about being a student is that you have a very good perspective on new technology.

And learning to get good at having new ideas takes a while.

That's 1 thing we hear from people all the time.

That they wish they had done more when they were a student.

The other is meeting potential co-founders.

You have no idea how good of an environment you're in right now for meeting people that you can start a company with down the road.

And the 1 thing that we always tell college students is more important than starting any particular startup, is getting to know a lot of potential co-founders.

So I want to finish this section of my talk with a quote from 50 Cent.

This is, this is from when he was asked about vitamin water.

But it's about the importance of thinking about what customers want and thinking about the demands of the market.

If you can just do this 1 thing, if you can just learn to think about the market first, you will have a big leg up on most people starting startups.

And this is something, this is probably the thing that we see wrong with Y Combinator apps most frequently, is that people have not thought about the market first.

So for the next section, I'm going to talk about building a great product.

And here again, I'm going to use a very broad definition of product.

It includes customer support and copyright explaining the product.

Anything involved in your customer's interaction with what you built from them.

To build a really great company, you first have to turn a great idea into a great product.

This is really hard, but it's crucially important, and fortunately it's pretty fun.

Although great products are always new to the world, and it's hard to give you advice about what to build.

There are enough commonalities that we can give you a lot of advice about how to build it.

1 of the most important tasks for a founder is to make sure that the company builds a great product.

Until you've built a great product, almost nothing else matters.

When really successful startup founders tell the story of their early days, it's almost always sitting in front of the computer working on their product or talking to their customers.

And you should be very skeptical if your time allocation is much different.

Most other problems that founders are trying to solve, raising money, getting more press, hiring, business development, etc.

These are significantly easier when you have a great product.

It's really important to take care of that first.

Step 1 is to build something that users love.

At YC, we tell founders to work on their product, talk to users, exercise, eat and sleep, and very little else.

All the other stuff I just mentioned, PR, conferences, recruiting advisors, doing partnerships.

You should ignore all of that and just build a product and then get it as good as possible by talking to your users.

Your job is to build something that users love.

Very few companies that go on to be super successful get there without first doing this.

A lot of good on paper startups fail because they merely make something that people like.

See all Y Combinator: The Vault transcripts on Youtube

Lecture 1 - How to Start a Startup (Sam Altman, Dustin Moskovitz)