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Startup Class Lecture 1 – The Five Components of a Great Startup

This post is a continuation of Lecture 1 of YCombinator’s class at Stanford called ‘Startup Class‘ which aims to teach “everything we know about how to start a startup, for free, from some of the world experts.” Whereas my first set of notes about the class talks about cautionary note on the difficulty of starting a startup (and why I’m writing these notes at all), this part of the lecture, given by Sam Altman, really starts delving into what makes a great startup.

The Five Components of a Great Startup

  • Great Idea
  • Great Product
  • Great Team
  • Great Execution
  • Luck

The Idea

There is a strand of thinking that has exploded recently is the notion that execution matters way more than the idea. This is sort of intuitive: after all no company is worth a billion dollars based solely on an idea.

It can also be comforting and empowering to think that if we do everything right in terms of execution then our business will surely succeed. That’s not only wrong, but it can be very misleading. There are lots of great startups with “all facets of their operation buttoned down” that are “heading straight off a cliff” because they don’t have product-market fit. See the classic Marc Andreesen post about exactly this. Also, for a great summary with excellent links to other readings on product-market fit check out this Sean Ellis post.

So ideas still  matter. Seems obvious right? I think the reason Altman spends so much time here is that he is responding directly to the recent trend amongst entrepreneurs to “throw everything up and see what sticks.” This is probably a byproduct of the (justifiable) popularity of Eric Ries’ The Lean Startup. If you’re not familiar with the book, it stresses creating a process where you iterate quickly until you find a solution that works.

Regarding iteration, Altman’s take on pivoting is pretty interesting too. He acknowledges that pivots are essential and evolution is important for a startup’s product. After all, there is a limit to how much you can figure out without getting product into the hands of users. But to Sam,

Most great companies start with a great idea not a pivot,” and “successful pivots tend to be towards a vision rather than a spur-of-the-moment response.

Of course this approach is also only possible because of the exponentially decreasing cost of starting a business.

The basic takeaway here is simple. “The Idea should come first. The startup should come second.” Put a little differently, if you don’t have a great idea yet wait for one before you start.

Where this gets more interesting is in breaking down the components that make something into a great business idea.

Components of a Great Startup Idea

Component 1: Mission

It’s important that a founder should be passionate about solving a particular problem rather than falling in love with the idea of starting a company. It takes years to build a startup (“usually a decade”) and if you don’t love what you’re doing and the problem you’re solving then you will be likely to give up at some point. More personally, why would you spend your time and energy to something you aren’t particularly interested in? Money isn’t everything.

Second, mission driven companies create more passion in other people too. It should be obvious why this matters. Let’s take recruiting talent, especially in the early innings of your company: You have little funding, no resources, no catered lunches, no nothing. How do you get people inspired enough to leave other opportunities to help you build your own vision?

The mission matters for retention too. Once you’ve recruited people, you still need to keep your coworkers happy and productive. Most work–even or especially at startups–is a grind. And the easiest way to keep people motivated through that grind is to believe in the value you are trying to create.

Finally, getting help outside of your company is easier with a strong important mission. People get excited by being part of something positive. That goes for advisors, investors, users. Basically, you will get “more support on a hard important project than a derivative one.”
Component 2: Market
Size, Potential/Growth, Existing Players, Sustainable Moats

You can basically change everything in a startup but the addressable market (Although Paul Graham argues Co-Founders are startups versions of “location” in real estate as well). The market is the ‘tailwind’ you need to push forward. For that to happen you need a large enough market to be scalable. But it’s equally important to think about the market 10 years from now, not just today (a mistake Altman believes most investors make as well).

A small but rapidly growing market can have specific appeal as it allows you to achieve meaningful penetration rates and capture market growth–both of which will facilitate sustainable company growth and allow you to scale concentrically (see Thiel’s lecture). How do you do this? By building “something that a small number of users love” and going from there.

That said, all of this is also only possible in a market that really needs solutions. While it’s possible to create entirely new markets, it’s often easier to create solutions to specific pain points in existing markets with established demand. 50 Cent summarizes this perfectly:

50 Cent on Market Sizing

Component 3: Defensibility
You want something that sounds like a bad idea, but is in fact a good idea. This limits initial competition.

In order to understand whether your idea is a great one you need to engage in term commitment to the vision and a deep understanding of your go-to market strategy. The SaaS blog has a great post on how thinking long-term in a startup is one of its key advantages over market incumbents. In fact, most of this blog is a must read for entrepreneurs (and not just those interested in SaaS businesses). Altman views planning as invaluable because of the process of thinking it forces you to go through. In his words “plans themselves are worthless, but the process is valuable.”

Part of this long term thinking is rooted in how defensible your niche will be. This is delved into more depth in a later lecture, (even though it is still somewhat cursory  there), but keys to consider here are technology moats, network efforts, cost structures, and branding.

Summary of Signs of a Great Business Idea and Getting Started

  • Almost always easy to explain and understand in 1 sentence
  • Able to answer: Why now. Why is this the particular time.
  • Easier to build something you yourself need initially
  • Need to make something people love, not just like (see product)
  • Start with a simple product and a small sub-segment of the problem
  • Conviction in your own beliefs

And remember, even with a great idea you may still fail.

Great Product

Over time a Great Product Wins.
The early days of a great startup are almost always (1) working on your product and (2) talking to users. All problems that founders solve are made easier with a great product. If you get your product right then you can get a lot of other things wrong and still succeed. Again, you need to start with something users love, not just like.

A likable product is a great way to fail over time without really understanding why you are failing, whereas a lovable product makes it easier to gain sizable traction. How do you know people love your product? Lots of word of mouth and organic growth. Sales and marketing, which get covered later are important, but a growth machine with a subpar product will ultimately waste time. Growth is a function of how much people love you:
Growth and Product-Market Fit

A corollary to product is growth. Growth is the engine of a startup. Below are a few of the key metrics Altman lists to help measure growth. There is a whole lecture on growth which will hammer this home in more depth. For now, just know that growth is important, and total registrations is far less important that active users and drop-off/attrition levels.

Startup Growth Metrics

That’s pretty much Lecture 1 in a nutshell. It frames everything to come in the context that:

  • Most startups fail
  • The road is a long and arduous one
  • You better have a good reason/mission/idea for starting your startup
  • Think about the components of your idea before you start
  • Focus on your product once you do

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