I think one of the most common problems incredibly smart hackers have is working on "businesses" with no real viable... business. They probably don't expect you to know everything there is to know about a given market, but it would be a little silly to make an investment in a group that can't think through money and evaluate how worthwhile something could be.
Totally resonate with this comment, when the article said:
"So our lesson learned is that, if you're a Scottish startup and want to apply for YC, make-up some numbers, and multiply them by 10, then walk into the interview and confidently say that you can make that much."
In my mind I saw potential investors rolling their eyes and saying, "Oh, one of those types."
Places like Google or Apple with billions of dollars in free cash flow can spend money to solve 'problems' for which their are no customers, startups cannot afford that luxury. There is a place where the goal is to come up with a novel solution to a hard problem, its called a 'research lab.' And something I always look for in people is where they sit on the spectrum between research and development [2].
The good news is that you can use this to guide your thinking about what the next steps are when you find yourself all revved up to solve a problem. Ask, "Would anyone pay to have this problem solved for them?" and if the answer is yes, figure out how much. And once you know that you know if there is a business there. And you can defend that number using your research.
If you don't know if anyone would pay for it, and after trying cannot figure out why they would or how much, then you are still doing research.
[2] Startup types need to be much closer to the 'development' side than the 'research' side.
mrkurt, ChuckMcM: As my co-founder mentioned in another comment a bit further down "We had been approached and offered investment as well as a global IT company asking for an exclusivity deal. However, I think the numbers that the Valley works on is on a different scale and that's what we are trying to convey in the blog post (not bulshitting without basis)." (http://hackerne.ws/item?id=4112064)
So I think we're passed the research stage, and we are actively developing software at the moment (no more research). Overall, as I mentioned in the post, the experience of going through a YC interview is definitely worth it, specially for guys like us who're doing our first startup. But we got the feeling that YC is after more consumer-oriented startups that can scale to huge numbers.
Fascinating, I don't think the ycombinator guys run the 'hackerne.ws' site, it looks like a pure MitM type deal (registrar name.com, hosted by ThePlanet in Houston TX?)
I don't doubt you're past the research stage, my comment was that your advice to 'make up numbers, multiply by 10, and then bullshit' is really horrible advice, Scottish or not.
My opinion is that if someone can't providing the reasoning behind their numbers from first principles then you're not in a 'business' you are in a research project.
I've heard dozens of pitches from folks who 'hand wave' around numbers and I sigh. They say "You can't know this, we'll just have to try it and see." And its true you cannot know what sort of revenue you will get but you can do the research to isolate what you know and what you don't know, and then you can come up with some tests for what you don't know which might inform the possible answer.
You're blog post advice tickled a bit of scar tissue that a lot of people reading this share.
There are really two ways to impress a super early investor like ycombinator:
1) Have some admirable amount of "traction", if you've managed to get 20,000 users for a product, that's pretty cool.
2) Be able to articulate why and how you're going to get traction, where the pool of interested users will come from, and how much money that could be worth in the best case.
YC does a ton with non-consumer startups (like mine), but we still have the same two hurdles to overcome. What you're probably sensing is that the viral features you can build into consumer startups are easy answers to some of their questions, though chicken and egg problems come up in most of those cases.
I had a similar experience as the OP, but we are bootstrapping and now ramen profitable since our YC interview rejection two months ago.
I wouldn't be so quick to equate their failure to impress YC with not having a viable business. It's 10 minutes and can go either way really, and certainly many YC companies fail to find a viable business model. Note that you are pitching three different partners, and might not get one that deeply understands the pain point (this was feedback from one startup that did get in but felt they failed to convince two of the other partners)
For us the feedback was that they thought it was unclear we could turn into a massive VC backed company. Rejecting us was supposedly the hardest decision they made all day. I guess we'll never know if that's true or not since we have decided to continue bootstrapping and won't be applying again with this company.
There is a whole spectrum of profitability between not profitable--ramen profitable--yacht profitable. IMO, a startup worth funding needs the money in order to scale, because what they're doing is working and they need to grow it. If you need operating cash, the cheapest you'll get is a bank loan (if you can get there) or even cash advances on credit cards.
Some businesses won't scale or won't scale well, which can be a perfectly fine situation as a 2-5 person startup. If I had a 2-person startup bringing in $500k in profit/year I'd be a happy camper, even if it couldn't scale further than that.
I think a lot of founders see investor acceptance as a certain validation to their business, when really it is a classification of their business. Investability isn't perfectly correlated with viability. Consultancies might be the perfect example of this -- they can generate major major cashflow, but you'd never want to be an investor in one. Doesn't mean consultancies are bad businesses, and YC's rejection doesn't mean yours is bad business either.
Great point. I do think the validation is something all new startups search for, and it sucks when you don't get it, but you have to realize there is a strong marketing campaign at work to make you care about stuff like that. We had fairly strong feelings about wanting to bootstrap our company before we applied, and I think not getting in really helped us solidify those values.
I will say that many companies that get funded from YC aren't ones that you described. Many have no users or even a launched product, just a big vision in a target market. There's nothing wrong with that, but I just wanted to point out that there is a difference between an unlaunched company getting seed funding and one that wants to execute on an opportunity and could really utilize capital.
I'm not clear what business the OP thinks that YC is in that they'd be interested in companies that don't have a story about how they could get huge. This doesn't have to be bullshit if your idea is a beachhead for something bigger. Not all startup ideas can have a story-- but I think most can if the founders are ambitious/imaginative enough. Example: If you had a hot social site for a single college in 2004, do you think you could spin a credible story on how it could be big? And, once it was big, how it might make money? Or if you sold books on the web in 1994, could you craft a story about how that get huge?
Here's our vision, do you think it will be huge?
Cloud computing is fundamentally changing the way that companies buy computing, and our vision is to be the one-stop-shop for computing in the future. The cloud's pay-as-you-go billing model is very different to what most people are used to, and we're developing tools to choose providers and deployment options. And we're just getting started...
So like you said, it's something that's not big now, but could be huge in say 5 or 10 years from now.
Even 5 or 10 years from now, there won't be that many more people shopping for cloud services than there are now. Right now people are talking about a startup bubble, how many more startups will be there 10 years from now? I doubt many more. There is a finite number of people that will start companies each year. Starting companies isn't for everyone.
Fortune 500 companies will probably switch more and more to the cloud, but they don't need a service since they have someone hired to analyze options.
Further, cloud companies will probably be resistant to a service like yours because it will negatively impact their margins. They will do things like bundle with services, etc in an attempt to drive their own margins.
Do I think eventually there will be a hipmunk of cloud service providers? Maybe, but you should be able to do better analysis than: making up a number, multipling it by 10.
Start with the number of startups launched every day, then determine how much you will make from each startup with each transaction. You can pretty much assume you won't get the enterprise users anytime soon.
You can also assume small businesses won't become expert enough to shop for cloud services and they would rather shop for a total service provider i.e. developer who knows the cloud. (that developer might service 20 small businesses, but only give you 1 transaction when they first research cloud providers).
> Further, cloud companies will probably be resistant to a service like yours because it will negatively impact their margins.
I should mention that we've been approached by a number of cloud providers who want to be included in our system. We currently support AWS, Microsoft Azure and Rackspace.
It sounds from your previous comments that you are a traffic acquisition play for these providers. You do the leg work and bring them customers, and for that they give you a cut of the action.
Its not a bad place to be, but it isn't necessarily a 'viable' place to be. For each customer you bring to them, how much do you make initially? Does the customer come back to you or do they start dealing directly with the vendor? Who answers support calls? What happens during an outage, do you get paged or the underlying cloud vendor?
If you don't make a whole lot per customer you have to make it up in volume, and you have to be sure that you are not spending more to get to that customer than the customer pays you. If the customer can cut you out of the loop, you have to know when they are likely to do that and why (volume requirements? custom configurations? etc) and generate a way to predict their exit. That will give you insight into their 'lifetime value.' Finally you need to figure out what is the barrier, if any, to someone else being in your space and going after the same customers (is your offering unique? protectable? etc).
Once you know those things then you know what sort of revenue you can expect for 1 customers, 10 customers, and 10,000 customes, and what it might cost you to acquire 1, 10 or 10,000 and by subtracting the second number from the first number, you can figure out how much money you have to pay staff and for facilities, and if you subtract off that cost and the number you have left is positive, then that number, as a percentage of the number you started with, can tell you if this business of yours makes any sense at all. Greater than 15% you can live off it, greater than 50% and you'll be able to expand into adjacent markets, greater than 80% and you'll grow like Google or Microsoft in its early days.
This one's a flyer, I think, because the answers to these questions aren't very compelling:
-How novel is this? (sort of novel)
-What is proprietary about it? (inherently nothing)
-How high is the barrier to entry for competitors? (low)
-Who are your possible competitors? (the cloud services themselves AND other companies like you)
So the end game looks like this: either the big cloud providers make their own tools like yours and make you irrelevant, or one of them acquires you. That doesn't seem too investable to me.
I do think it's a perfect 3-5 person startup that you have a good chance of cashing out of, so don't take my post as criticism. As far as I can tell you need an advisor to help you with the "how do I make money" question more than you need an investment.
Assuming they are all paying you a percentage of sales, how big could it get?
Meaning, what is the largest you could see your revenue grow to?
With some paying customers it should be pretty easy to model your future revenue. Once you know the number you can estimate profit, then divide it by .1 to .2 to get an approximate exit market cap.
We had gone through our business case and it was solid. We based our numbers on what we had achieved in the first two months of launch (with 0 marketing budget). We had been approached and offered investment as well as a global IT company asking for an exclusivity deal.
However, I think the numbers that the Valley works on is on a different scale and that's what we are trying to convey in the blog post (not bulshitting without basis).
You note that nowhere in your YC application do they specifically ask you about money stuff.
But, you talked to some YC Alums before the interview and they all asked you about $.
And since you didn't get selected you now assume that the YC partners really only care about the $? Sorry, I think that's a leap in thinking that might be in the wrong direction.
I applied with a website that let people name & share color... There wasn't billion dollar company sitting in front of them. There were a few guys with a passionate community and the ability to build great product. We were never asked in our interview about $ and didn't need to bullshit anything.
Yes, the Valley hype scene is heavily influenced by who's the next billion dollar company and puts little success on people making $5-10M/year in great businesses... But that isn't YC.
PG has on a number of occasions given me advice that is all about us as the founders being happy. Not about YC getting the biggest return possible.
So yeah, hopefully your idea could be a big business. But I would argue the opposite of what your post says. YC mostly cares that your idea is big and that you are a team that might be able to pull it off.
And IMHO... Try not to bullshit. It'll eventually catch up to you.
> You note that nowhere in your YC application do they specifically ask you about money stuff.
Sorry maybe I was slightly vague in the blog post, the YC application form has a specific question on money [1], but as I said in our post, we answered it with by just described the ways in which we might make money in the future (our revenue streams and potential exits). We got the impression that YC is after startups that it can parade in front of VCs on demo day for their series A, and for that they need to be more than $5-10M/year.
[1] "How do or will you make money? How much could you make? (We realize you can't know precisely, but give your best estimate.)"
In the most recent application round, they did specifically ask about money in the application. And they asked my team about money in the interview as well (with a visibly negative reaction from an interviewer when the number we gave was smaller than he apparently wanted to hear). Please don't assume that your experience is the same as everyone else's. Perhaps the fact that you already have a strong community gave you a free pass with regard to money issues.
My bad. Mistyped. He specifically said they didn't focus on $ in the app. Yes there is a question that asks about it. (We review applications too), But that isn't a core focus in the application.
And its a bit ironic to tell me no to assume my experience is the same as everyone else's on a blog post telling everyone else how to treat the YC interview, no?
I've said this many times before and perhaps need to include it on every comment regarding startup advice. There are some common concepts, useful general practices, etc. But it's a very different experience for all of us. There is no general advice that will work every time for everyone. Take ideas that work well with you... leave the rest.
As someone who's both conducted interviews for an incubator, and been through the YC interviews, I think you're focusing on the wrong thing here. "The team" goes a lot beyond paper qualifications, and I think a lot of your shortcomings are there if anywhere:
* You changed your answers quickly before your interview because you hadn't thought them through before-hand.
* You weren't confident.
* You weren't committed. This is the big one for me. If this is a great idea, why is putting your PhD on hold conditional on getting into YC?
YC often accepts startups with ideas they don't like. We got a phone call right after walking out the door even though half the partners still weren't convinced of our idea. The important thing isn't having amazing figures at the start, it's being able to think things through. The YC partners can help with tuning to get the most impact. (It honestly doesn't seem like this is the biggest issue for them, either.)
As I mentioned in the post, we changed our answer because we were overwhelmed by the YC Alumni placing an important emphasis on the figures.
You can't advise someone to put their PhD on hold if it's a great idea without knowing the status of their PhD progress. I'm very close to finishing, I only have to write my introduction and conclusion chapters, the rest is all done, and I have published several papers. So I don't think it would be wise to put it on hold when I'm so close to finishing.
If I was YC, I'd be placing my bets on the companies who say they can give me bigger returns. So I think YC's final decision might be heavily influenced by figures.
I understand wanting to get into YC, but if your figures were wrong, you should have known that long before the interview. If your figured weren't wrong, and you changed them for the interview, that's also a pretty big problem. We got in with half the partners disliking our idea. I don't know how they can make it more clear than the "no idea" application - they care about the team so much more than the idea.
The biggest thing for me is this: if you were willing to put your PhD on hold with YC, you should be willing to put your PhD on hold without YC. The fact that it changes your answer is probably one of the biggest reasons you weren't selected. pg has stated before, YC doesn't want to make companies succeed. They want to make companies which _will_ succeed more successful. Successful teams know they're going to be successful with or without YC.
If you were turned away for low numbers, they would have said so in the rejection email. I find it unlikely that they did, or you would have posted it, I'm sure. The fact that so many people are giving you advice as to actual problems, and that you're ignoring them, is a pretty big issue.
tylermenezes is utterly right - I would up vote his reply 10 times if I could.
Dude you need to stop ignoring all the good advice you're getting. PG says the single most common trait to unsuccessful teams is that they get defensive and object to suggestions.
Unfortunately not - the programme looked interesting, but I skipped out on it to go watch the Olympic torch go by :) I don't regularly make them, but I was at the one at the Amazon offices a while back.
We didn't just make some numbers up, we made assumptions (e.g. 1% of users would signup to premium version), BUT the problem we had was that we've been brought up in a culture where people look down on you if you say you can make $5M/year, they say that it's bullshit. So although we knew we could make that much, we needed to be more confident in communicating it.
Having been in both SV and the UK, the difference you mention is one of culture.
In SV you are supposed to be super-enthusiastic and ambitious, the world is your oyster, etc. Any deviation from that will have investors worried that you don't have enough confidence.
In the UK, on the other hand, the approach is more defensive, and encourages you to avoid over-stating your case,in case you are wrong.
I always found Dragons Den to be a bit disappointing in terms of the ambitions of the people pitching. A 1/2 million per year business is no bigger than a cafe in a popular spot.
Specifically: the enthusiastic, go-getting, I'm gonna win, we've got the numbers, it can't fail attitude that you encourage ("Get going. Dive in. Make stuff happen.") is not encouraged in the UK, and in the UK is described as "bullshitting" (this may be different from the US understanding of "bullshitting"). The reason being that these projections/ambitions for success are not based on hard facts, but on the ambitions of the presenter.
Where SV, and yourself it seems, differ is they accept at the outset that failure is a possibility, but that avoiding failure is not only a matter of soft or hard facts, market conditions, etc, but also of the character of those involved.
Thus, an enthusiastic and ambitious UK team may focus too much on why they "won't fail too much" (i.e. their ambitions are not too unrealistic), whereas a US team would focus on how they are going to whip ass.
That's not the cultural issue he raised. He suggested that Scottish seed investors wouldn't ask about projections or market size because the Scottish just don't talk about such things. Yeah right: http://www.archangelsonline.com/content.asp?Page=399&Men...
Regarding your comment on SV culture: exaggeration is a losing strategy when dealing with SV investors. They want realistic sobriety, and dislike naive cocky projections.
Regarding your interpretation of my comments: there is not one shred of "enthusiastic, I'm gonna win, we've got the numbers, it can't fail" attitude in my comments. Much to the contrary: I was saying he's completely unprepared to do a startup, but the best way to remedy that problem is to dive in head first, start failing, and learn from the school of hard knocks.
There are plenty of people in SV who are deathly afraid/ashamed of failure too. They just don't tend to start companies.
There are plenty of superb UK born entrepreneurs, both here and in the UK. Where do you think the industrial revolution began? The only bullshit I'm detecting here is the inclination of certain people to hide their shortcomings behind convenient excuses.
The culture issue that pcrh mentioned is what I was referring to. It's not that Scottish seed investors don't ask about projections, it's that if you're a Scottish startup and what to apply for YC, you have to be thinking about much bigger numbers and get into that mindset of "go-getting, I'm gonna win, we've got the numbers" that pcrh mentioned.
Eitherway, thanks for the discussions and comments. I've emailed you a quick question :)
I was referring to the style of presentation, rather than to whether the underlying business model is viable or not.
However, I would add that if they did not consider their market properly, or run any numbers before their interview, then that probably contributed to their lack of success this time, "bullshitting" or not.
Sorry I stand by my initial statement. The problem was that you knew the numbers were no good, not that you needed to be a better actor.
When I was younger i would have agreed with you. But now that I've been a founder of successful companies and in management at a major Internet company, I know from experience that sales
projections can range from a total wild-ass guess all the way to rock solid numbers that you can bank on.
Investors love the latter and hate the former. Sobriety is much admired by VCs and cocky posturing is a losing approach. The more experience you have, the more you will understand how to soberly and realistically estimate an opportunity.
Some opportunities really are sized with more digits than others, and this fact has nothing to do with culture.
Read the recent article titled something like "VCs lie, and I do too". He points out that it's really hard for VCs to give candid feedback about shortcomings in the team. I have no such difficulty: your team is woefully inadequate, today.
Get going. Dive in. Make stuff happen. Be extremely realistic and especially honest with yourself about the opportunity you're addressing. I was a naive punk once too, and remain a slow learner. You have a lot to learn but if I could you definitely can.
As someone who's been there, it's super interesting how different everybody's interview experience is. I get the sense they tailor their strategy for each company, whether it's advance prep or just going with their gut. YC seems to have a nose to sniff out the most likely place a startup will raise a red flag. (One failure mode for them is if the interviewer guessed wrong.)
You're right, they go through so many interviews (around 370 in our batch) that they probably develop gut feelings about which startups to pick. But like you said, they might have guessed wrong in our case.
Sorry I wasn't clear. The guesswork I was referring to was to figure out the most probing question to ask of each startup. If you guess right you just learned something relevant to the decision. But if you guessed wrong, if you could have asked a more probing question, you might end up accepting a startup you shouldn't have.
I don't know enough about your situation, and I wasn't implying any judgement either way. I was just trying to put myself in their shoes.
We weren't quizzed much about our numbers (I don't think money was really brought up at all) but asked more about the product (what it does, who uses it, why they use it, etc). That may have been because we're in the enterprise market (project management) and our competitors are quite well known, so they would already have an idea of potential revenue.
Completely agreed about a difference in scale between US (your comment said UK, typo?) and rest of world. We knew we could make money but it seems like YC is after more consumer-oriented startups that can scale to huge numbers. So if you're like us from the UK, where the culture is much more conservative, what choice do you have? We spoke to groups that were telling us they could make upwards up $20M in 2-3 years! How can you justify that when you've just launched 2 months ago and have made 0 so far.
