I have proceeded to my next module in Y Combinator’s startup school; this time YC Partner Kevin Hale is showing us how to evaluate startup ideas. Here are my thoughts, elaboration and the key points from the course.
To begin, I read some time ago that serial entrepreneurs typically carry a list of somewhat 100 startup ideas. I can easily relate to that; if your thing is thinking of ideas for new ventures and you really enjoy it, you will for sure end up with a massive list at some point.
Stemming from it it is vital to separate bad ideas, which come in heaps, from the good ones. This just makes practical sense; I hate to end up using time, energy and my fantasy power in delusional thinking patterns that will not work at the end. I assume I am not the only one thinking alike; better to cut the weeds when they are still young.
Ok, so what Kevin’s view on this?
First of all, he is point out that this is a more advanced topic. So, if you are reading this, congrats, you have probably identified that not all your ideas are great and you need something to filter or evaluate your ideas. This is great since you are then further along the path of developing a startup entrepreneur mindset than your average daydreaming Jane or Joe.
“[Evaluation of ideas] is also a really great sort of 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 like how do you evaluate whether something is worth going to? And if you’ve already had a launch company, then you might have problems with like why isn’t this growing? Or how do I improve it?”
Then comes the key question; what differentiates a normal small business and startups?
Y Combinator is essentially an investment house and they have no interest in businesses that do not want to grow.
“At YC, the definition of a startup is a company that is designed or created to try to grow very quickly.”
I agree with this. In fact, I recently learned that in Finland typically per year there are somewhat 25 000 new different businesses or similar founded, however, when filtering them through for those which actually are aiming for scalable international growth, the list comes down to only 100 companies. This is a ridiculously small portion.
I think it is important to point this out; if you want to grow quickly, you need to think, work and educate yourself into it. Depending on mere good wishes will not take you there.
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.
Yes. Straight to the point. As I explained in my previous article, based on the previous YC startup school module, it is about the customer, not you. That’s why you need to test to see what works. You need to test your hypothesis. If you follow anything written of the famous Netflix founder, Marc Randolph, you get a second, and heavy, opinion to this; it is all about testing your ideas.
Next, Kevin will break down the hypothesis into three parts; problem, solution and insight.
“You have to explain to me, like, what is the setting for this company that allows it to be able to grow quickly.” [Problem.]
“…what is the experiment that you’re basically running within those conditions for it to grow really quickly?” [Solution.]
“…what’s your explanation why the thing that you’re going to try, your experiment is going to end up being successful?” [Insight.]
Then Kevin goes and takes a deep dive into all of these starting from the first, the problem. Basically, the World is full of problems, but from a startup founder’s perspective, a great problem is:
- Popular. Meaning it is big in numbers. Many are affected by it.
- Growing. It is not going away.
- Urgent. It needs a solution quickly.
- Really expensive. This means you will get your share when solving it.
- Mandatory. Something that can not be passed, but needs to be tackled.
- Frequent. Thus, coming up over and over again. Which is key since it will offer plenty of triggers for folks to convert to your customers.
Look at your idea. If it is missing all or most of these points, chances are you would be better to kill your idea and move to the next.
Ideally, you have many of the above characteristics.
Then Kevin surfaces the work of BJ Fogg, a Stanford researcher, who uses the formula “B = M + A + T” often. This means basically that for your potential customer to convert to an actual customer he or she needs to change their behaviour (referring to B). For this to be in place, we need three things; Motivation (the problem to be solved), Ability (your startup’s solution to solve the problem) and finally the Trigger (which I would refer to the sale; in essence explaining the potential customer that your solution will take care of the problems).
Easy right? Not very deep mathematics. =)
Kevin opens up what YC considers ideal relating to a problem’s dimensions. This is important since it should help you to think your idea from this perspective as well. I’ll quote Kevin below with a lightly edited version, just to ease the readability.
Popular means that you count pontential users or customers in the millions.
Growing means that is a market that is growing at least 20% per year.
Urgent means right now
Really expensive is a that is, at least, summing up counted in the Billions.
Mandatory means that ideally a law has passed. Which means a ton of customers are rushing to the market.
Frequent ideally is hourly, which means a ton of new points of triggering the conversion.
Then to the next pillar of the startup hypothesis; the solution. Here Kevin points out his single piece of advice, which he is saying it’s the best advice he has on the solution bit. Don’t start with the solution first.
“…like, oh, man, I wish they had started with the problem first, and we call it SISP. It means Solution In Search of a Problem.”
Kevin stresses the point that it is much better, and way more efficient, to go directly to people and try to solve their problems than do the solution first and then try to shoehorn your solution to the problems. I agree you learn more, you grow quicker, and you get a lot more pleasure of the whole thing.
If fact, I have seen this so many times here in my home country, Finland. We’re pretty good at making thing and fiddling with technology. But sadly too often I see people, who maybe are great in engineering, but who are essentially trying to convince the World that their solution is great instead from working from the problem.
Kevin point out what is the winning attitude:
“You go, like, I’m going to do whatever it takes to solve people, users’ customers’ issues.”
Then we tackle the last part of the startup hypothesis, meaning the insight, which really is about understanding what is your unfair advantage. You need to know why you are going to win and not everybody else.
Again, Kevin explains the types of unfair advantages in a solid manner, which he’s saying that you do not need to have all of them; Kevin says great startups not surprisingly often have many, but you are good in having 1–3 of them.
Founder unfair advantage relates to the rareness of the skills and things the founders are bringing to the table. Are you a super expert in the startup field? Kevin mentions you need to be 1 in 10 to qualify in this category, I would go further and say it would be better to be 1 in 100. For example, when I state that I am internationally experienced in the health sector, have specific skills in ICT technology focusing o prevention of communicable diseases, EMRs and interfaces, and am well experienced both running startups and how to build fast-growth companies, I would say that will put me into the 1 in a 100 -category considering health startups. Just as an example. =)
Market unfair advantage refers to you having a certain position in the growing market that will ensure your place, or as Kevin points out that “you’ve picked the right problem space and the right set of customers that want your problem“.
Product unfair advantage is simple; it is the 10X -factor. In Kevin’s words;
“Is your product 10X better than the competition? If it is, then you potentially have an unfair advantage and it has to be very, very clear. 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, etc. And if it’s not in 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.”
Unfair advantage for Acquisition means that you need to go further than to just show your Customer-Acquisition-Cost, CAC and Life-Time-Value, LTV, of your customer are meeting the standards. You need to be sustainable with your revenue generation model, you need something that positions you with an advantage so that the customers are flowing back to you at the time when your competitors have ramped up with their Paid-Per-Click, PPC, efforts. Otherwise, you will just end up having no customers.
Kevin underlines that “You want to find acquisition paths that cost no money”, and shows the good side of being broke “…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?”.
Finally, Monopoly unfair advantage refers to you having a stronghold that is hard to defeat, or as Kevin illustrates “as your company grows is it more difficult for you to be defeated by competitors?”.
Then to recap,
- You and your Founders need to be, at least, in the 1 of 10 people -category.
- The Market needs to grow at 20% a year and you need a special position in it.
- Your Product needs to be 10X better than competitors.
- Your customer Acquisition cost is eventually a plain 0$.
- Monopoly is boolean meaning it’s very hard for others to compete with you.
Finally, before going to examples, which I encourage you to check from his original talk, Kevin delivers a final key point:
“…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.”
Alright, we are through! If this raised some thoughts, I’d love to hear from you, so please post comments and replies at your pleasure. Furthermore, I invite you now to look, as so does Kevin, at your startup idea. Go through all the steps above and see where you fall in gaps and where you stand strong. If you have written a business plan, see if it has all the key points included.
Thank you for your time and all the best with your venture!