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

Welcome to CS183B. I’m Sam Altman, President of Y Combinator. Nine years ago, I was a Stanford student who dropped out to start a company and have since been an investor. At YC, we’ve been teaching how to start startups for nine years. Most of it is hands-on and specific, but about 30% is generally applicable, and we aim to teach that in this class. This is the first time much of what we teach at YC will be available publicly. We’ve funded 720 companies, so we believe the advice shared here is solid.

Guest speakers will cover 17 of the 20 classes, and they’ve been involved in creating billion-dollar companies. The advice is grounded in real-world experience, aimed at hyper-growth startups. Much of it may not apply to large companies or non-startups, but it will still be interesting and valuable.

Throughout this course, we’ll focus on four areas crucial for startup success: a great idea, a great product, a great team, and great execution. While the outcome depends on these factors and luck, excelling in the controllable areas increases your chances of success.

Startups are an even playing field. Whether young and inexperienced or older and seasoned, anyone can succeed. Surprisingly, being poor or unknown can be an asset when starting a startup.

Why Start a Startup

Starting a startup should not be done just for the sake of it. There are easier ways to get rich, and it’s often much harder and more painful than expected. You should only start a startup if you feel compelled by a specific problem and believe starting a company is the best way to solve it. Passion for the problem should come first. The best successes at YC have followed this model.

Dustin Moskovitz, co-founder of Facebook and Asana, will later discuss why to start a startup. We want to make sure we spend enough time on this important question.

1. A Great Idea

It’s become popular to downplay the importance of the idea, suggesting that the focus should be on execution and rapid iteration. While it’s true that great execution is much more important and harder than a good idea, the idea still matters. A bad idea cannot be saved by good execution.

Many successful companies began with a great idea, not just a pivot. For instance, Airbnb started because Brian Chesky couldn’t afford his rent but had extra space. Great companies often start with an idea that appears bad at first. Look at early tech ideas like Google, which seemed unnecessary at the time, or Facebook, which started as a limited social network for college students. These ideas looked terrible at first but turned out to be great.

The idea includes several factors: the size of the market, growth strategy, and defensibility. When evaluating an idea, think long-term and plan for the growth of the business. A startup takes years to build, so it’s worth spending time considering its potential future value. Plans are often worthless, but the exercise of planning is very valuable.

Start with an idea that you believe in and feel compelled to pursue. If you’re considering multiple ideas, choose the one you think about most often when you’re not trying to think about work. This is a key indicator of which idea you should focus on. Founders often regret starting their ventures without a strong passion for their ideas.

Mission-Oriented Ideas

The most successful startups are often mission-driven. A strong mission will keep you motivated through the inevitable hardships. Without a deep belief in what you’re building, it’s easy to quit. Many founders, especially students, expect their startup to take just a few years. In reality, building a successful startup usually takes ten years.

Mission-oriented companies also attract more help from others, including investors, partners, and customers. If you can clearly convey the importance of your mission, people will want to support you.

Derivative companies—those that simply copy existing ideas—rarely succeed because they lack excitement and innovation. The best companies usually have a unique mission and a compelling vision that inspires others.

Conviction and Market Understanding

Great ideas often seem unappealing at first. The key is having conviction in your beliefs, even when others don’t agree. Most people will think your idea is bad at first, and that’s a good sign because it means there won’t be much competition.

When evaluating a market, it’s important to think about its future growth. A market that seems small today may become large in the next decade. A growing market is crucial, as it indicates demand for your product. Many investors focus on the current market size, but it’s the growth rate that matters more. Small but fast-growing markets are ideal, as customers are eager for solutions and willing to accept imperfect products in the early stages.

Being a student often gives you an advantage, as you may have a better sense of which markets will grow rapidly compared to older entrepreneurs. However, don’t try to create a market that doesn’t exist. The market is one of the few things you can’t change in a startup, so it’s vital to ensure the market is there and growing.

Timing and Market Trends

Timing is crucial. You need to answer the question: “Why now?” Why is this the perfect time for this idea, and why couldn’t it have been done earlier or in the future? The best startups often have a great answer to this question. If you can’t answer it convincingly, it’s a red flag.

It’s often easier to start a difficult, mission-driven startup than a simple, derivative one. With a strong mission, you’ll be more motivated to push through challenges, and others will be more likely to support you.

Focus on finding an idea you care about deeply and one that aligns with your long-term vision. The market you’re entering should be poised for significant growth, providing a tailwind that helps propel your startup forward.

Getting Close to Your Customers

• Engage directly: Work in their environment, or communicate with them regularly.
• Simple ideas: Successful startup ideas are usually easy to explain in one sentence. If it requires more, it may be too complex.
• Unique or different ideas: A good startup idea is either radically different from existing products (like Google) or completely new (like SpaceX). Avoid incremental clones with only small differentiators.

The Importance of Co-Founders

• Meet potential co-founders: College environments are ideal for meeting people who could become future co-founders.
• Building relationships is key: Focus on connecting with potential partners rather than rushing to start a company.

Thinking About the Market First

• Customer-centric approach: Think about what customers want before you start developing your product.
• Avoiding failure: Many startups fail because they haven’t considered the market’s demands early enough.

Building a Great Product

• Broad definition of product: The product includes not just the physical or digital offering but also customer support, documentation, and all aspects of the customer’s experience.
• Focus on building a great product: A strong product is crucial for startup success. Prioritize product development over everything else like funding, hiring, and marketing.
• Lean focus: Do not get distracted by business development or public relations until you have a great product.

Two Key Jobs: Build Something Users Love

1. Build something users love: Ensure your product resonates deeply with users. Products that people just like aren’t enough; they need to truly love it.
2. Focus on a small group: It’s better to build something a small group loves than something a large group only likes. It’s easier to scale from a loyal base than to improve a lukewarm product.

Organic Growth and Word of Mouth

• Organic growth is a good sign: If your product is truly loved, users will share it with others, leading to organic growth.
• Don’t rely on partnerships initially: Early-stage growth should come from organic user interest, not partnerships or ads.

Starting Simple

• Start with simplicity: Even if your long-term plans are complex, start with a simple version. Successful companies, like Facebook or Google, began with very simple ideas and designs.
• Focus on one thing: A simple product forces you to do one thing really well. Successful founders are fanatical about product quality and attention to detail.

User Feedback and Iteration

• Manual user acquisition: In the early days, personally recruit users. Don’t rely on paid advertising.
• Tight feedback loop: Continuously collect feedback from users and use it to refine the product. This loop should be fast and ongoing.
• Ask the right questions: Ask users what they like, dislike, and what they would pay for. Use this feedback to make improvements quickly.

Metrics for Success

• Track the right metrics: Focus on active user growth, retention, and engagement. Avoid vanity metrics like total sign-ups.
• Stay honest: If your metrics aren’t improving, reassess and adjust your approach.

CEO’s Role in Customer Engagement

• Founders should handle support: In the early days, founders should be directly involved in customer support and product development to understand user needs.
• Stay hands-on: It’s crucial for the founders to maintain direct communication with users to ensure a strong product-market fit.

Final Thoughts

• Product quality is paramount: Until you have a product that users love, nothing else matters. Focus on building a great product before worrying about anything else.
• Enjoy the process: Building a great product is one of the most rewarding parts of starting a company.

---

Why You Should Start a Startup

• Know your motivation: People start startups for various reasons, and it’s important to understand your own motivations.
• Evaluate your reasons carefully: Some common reasons to start a company include solving problems, creating something new, or pursuing a passion. Understand what drives you before jumping in.

Common Reasons for Starting a Startup

1. Glamour: The idea of being your own boss and having flexibility.
2. Control: You get to make all the decisions.
3. Impact: Potential to have a larger impact on the world.
4. Financial Reward: The potential to earn more money than by working at a later-stage company.

The Reality of Entrepreneurship

While entrepreneurship is often romanticized in the media, such as in The Social Network, the reality is much different:

• Hard Work: Most of your time is spent on routine tasks like customer support, sales, and solving engineering problems.
• Stress: Entrepreneurs face immense stress due to the responsibility they bear for their employees and their financial future.
  • You are responsible not only for your own success but also for the livelihoods and Opportunity Costs of your team.
  • The fear of failure is magnified because others depend on you.
  • Stress is constant, and you’re always on call, even during vacations or weekends.
  • Fundraising can be particularly stressful, with constant pressure and the fear of disappointing others.

Challenges of Entrepreneurship

• Media Scrutiny: Positive attention may come, but negative media coverage (like from Valleywag) can be difficult to handle.
• Commitment: As a founder, you are much more committed than employees. Employees can leave when things get tough, but founders rarely can. Leaving is seen as a failure and harms both your career and your employees’ prospects.
  • The commitment often spans five to ten years, even if the startup fails.
  • Managing stress is key; many entrepreneurs face mental health challenges like anxiety and burnout. Ben Horowitz states that the top responsibility of a CEO is managing their own psychology.

Perception vs. Reality of Being the Boss

Many believe that being the boss gives you total flexibility and control over your schedule. However:

• Always on Call: While you may think you control your schedule, you’ll often find yourself working when you didn’t intend to.
• Role Model: Your energy and commitment directly influence your team. If you ease off, your team will follow suit.
• Hard Work: If you’re passionate about your idea, you’ll likely find yourself working harder than you expected. Working with motivated investors and partners will push you to put in even more effort.

Financial Rewards and Impact: Startup vs. Late-Stage Companies

Many people are attracted to the idea of having a larger equity stake and potential financial reward in a startup. But is it always true?

1. Example: Dropbox vs. Facebook:

   • Employee #100 at Dropbox: potential to earn $10 million.
   • Employee #100 at Facebook: potential to earn $200 million.
   • Even employee #1,000 at Facebook in 2009 made $20 million.

2. Theoretical Startup:

   • Let’s consider starting a company like “Uber for Pet Sitting,” aiming for a $100 million valuation. Your equity stake would likely be 10% after dilution, so you’d have $10 million potential earnings.
   • If your startup idea is even bigger, like “Uber for Space Travel” with a $2 billion valuation, your potential return would be much larger.

Financial Reward and Impact in Late-Stage Companies

The financial reward and impact from joining a late-stage company can be significant:

• Multiplier Effect: Established companies like Facebook or Google have a massive user base and existing infrastructure. You can leverage this to scale your idea and make a huge impact.
• Team and Resources: Working with an experienced team and having access to proprietary technology gives you a strong platform for success.

Example of Success at Late-Stage Companies

• Bret Taylor joined Google as employee #1,500 and went on to create Google Maps, a product that has had a massive global impact.

In summary, the decision to start a company or join a later-stage one should be weighed carefully, considering not just the financial rewards but also the personal commitment and the potential for impact.

bably use every day. I used it to get here. And it’s used by hundreds of millions of people all around the world. Didn’t need to start a company to do that, did happen to get a big financial reward. But the, the point is he had massive impact. My co-founder Justin Rosenstein. Joined go, Google a little later after Brad he was a PM there. And just as a side project he ended up prototyping a chat which, which used to be a standalone app as integrated into Gmail, like you see it on the upper right there. And before he did that, like people didn’t even think you could do chat over AJAX, or chat in the browser at all, and he just kind of like demonstrated it, and showed it to his team, and made it happen. Again, this is probably a product most of you use maybe every day. And then, perhaps even more impressively, shortly after that,. JR left, he became employee around number 250 at Facebook. And he led a hack-a-thon project along with people like Andrew Bosworth and Leah Pearlman uh, to create the like button. So, this is one of the most popular elements anywhere on the web. Totally changes how people use it. And again didn’t need to start a company to do it and almost certainly would have failed if he had tried. Because he really needed the distribution of Facebook to make it work. So important to, to keep in mind the context for uh, what kind of company you’re trying to start and like, where will you actually be able to make it happen. So what’s the best reason? So, Sam already talked about this a little bit but basically, you can’t not do it. You’re super passionate about this idea. You’re the right person to do it. You’ve gotta make it happen. So how does this break down? >> Cuz we’re getting close to end here. How am I doing on time? >> Cool. Sweet. Perfect. So this, this is sort of like a word play. You can’t not do it in two ways. One is, you’re so passionate about it that you’re just like, you have to do it. You’re gonna do it anyway. And this is really important. Cuz you’ll need that passion to get through all of those like hard parts of being an entrepreneur that we talked about earlier. You’ll also need it to effectively recruit. Candidates can smell when you don’t have passion. And there are enough entrepreneurs out there who do have passion. That they may as well work for one of those. So this is sort of like table stakes for being an entrepreneur. Your subconscious can also tell when you don’t have passion and that’ll be a huge problem. And then so the other way to interpret this is the world needs you to do it. So this is sort of validation that the idea is important. It’s gonna make the world better, so the world needs it. If it’s not em, if it’s not something the world needs, go do something the world needs. Your time’s really valuable. Um, there are plenty good ideas out there. Maybe it’s not one of your own. Maybe it’s an existing company. But you may as well work on something that’s gonna be good. And then the second way to interpret this is the world needs you to do it. You’re actually well suited to this problem in some way. If this isn’t true it may be a sign that your time is better spent somewhere else. But also just best case scenario if this isn’t true, you out compete the team for which it is true. And you just end up with like a sub-optimal outcome for the world. That doesn’t feel very good. So drawing this back to my own experience at Asana, you know, Justin and I were kind of like reluctant entrepreneurs. We, before we founded Asana so we’re working at Facebook. We were already working on a great problem. And we would basically work all day long on our normal projects and then at night we would keep working on this internal task manager that was used internally at the company. And it was just cuz we were like so passionate about the idea that was so clearly valuable, that we couldn’t do anything else. And at some point we had to have the hard conversation of like, okay well what does it mean if we don’t actually start this company. We were pretty, we were able to see the impact it was having on Facebook. We were pretty convinced it could be really valuable for the world. We were also pretty convinced nobody else was gonna build it. The problem had been around a long time and we just kept seeing sort of incremental solutions to it. So if we didn’t go out with the one that we thought was best, we thought there’d be a lot of value left on the table. And yeah. So we just couldn’t, couldn’t stop working on it. And literally the idea was like beating itself out of our chest, like forcing itself into the world. And I think that’s the feeling you should really be looking for when you start a company. That’s how you know you have the right idea. So I’ll go ahead and stop there. I’ll put some recommended books up here, but won’t narrate them. And maybe, that’s the end of the class. >> Yeah, thank you. Maybe you guys could stick around for a few minutes if you have questions for him. And uh, see you Thursday. Thank you.