13 Insights From Y Combinator

That Every Founder Needs to

Know
This is what the number one accelerator in the world
wants you to know when starting a company, and
how you can immediately test and implement them.

Jaryd Hermann
Follow
Feb 19 · 15 min read

If you’re a startup founder, then you’ve most likely heard of Y

Combinator— the number one tech accelerator in the world.

YC, as it’s more commonly called in the industry, knows exactly

what they are doing when it comes to validating founders’ ideas,
building something people want, and scaling them up to raise
outside capital. Their methodologies and ideas have helped billion
dollar companies like Airbnb, Dropbox, and Stripe.

There’s good and bad news.

The bad news is that getting into YC is harder than getting into
Harvard, just over 300% harder. According to Hackernoon, the
acceptance rate is just 1.5%.
(Sidenote, you can now Apply Early for YC S20)

The good news is that YC runs a free 8-week online program

called Startup School. YC not only gives founders a huge variety of
deals and benefits (including $5,000 in AWS credit), they also
teach their fundamental insights and approaches to starting a
great company.

As a founder that has graduated from Startup School, I’ve revised

and condensed what my team and I learned into the 13 most
useful lessons.

1. Focus on a few, correct KPIs

You will build, optimise, and focus, on what you measure. Set just
3–4 KPIs that are meaningful reflections of your progress and
relevant to your business model. Avoid distractions by leaving out
any other vanity metrics.

If you want to increase the number of customers signing up, put

that number clearly on the wall and plot it periodically for you and
the team to track. You will be delighted when this grows and
disappointed when it doesn’t. Plus, you will start to notice the
factors that cause it to move in either direction. The more
numbers you’re tracking, the more room for distraction you create.
Make this simple by having numbers that have a material impact
on your business. For instance, revenue, profit, user retention, etc.

When choosing metrics, ensure they:

1. Represent delivery of real value
2. Capture recurring value
3. Have a usable feedback mechanism

You should have just one Northern Star Metric (NSM). YC says
that for most businesses, this is revenue.

Set your primary metric by questioning which number is most

important to your business. For some companies that sell physical
products, this figure will likely be revenue, for others selling ad
space it may be active users. Then, decide on two or three
secondary metrics. In the early stages, you don’t need a fancy
dashboard, you can put these into a shared Google Sheet with your
team, set weekly goals for these numbers, and track your progress.

2. Launch it already
The faster you launch, the faster you will be able to learn if you’re
building the right thing. The longer you build without identifying
this, the more you risk wasting your time. Launching allows you to
speak to actual users and validate this assumption.

According to Paul Graham, founder of YC, “The reason to launch

fast is not so much that it’s critical to get your product to market
early, but that you haven’t really started working on it till you’ve
launched. Launching teaches you what you should have been
building.”

As a founder, one of the biggest things to consider is

your opportunity cost — the loss of potential gain from other
alternatives when one alternative is chosen. You want to be
working on the right product as fast as possible. Before launching,
you have no idea if your hours are going into the right thing. The
main value of launching quickly is the opportunity to speak and
engage with users.
Kay Manalac, a YC partner, encourages founders to change the
way they think about launching. She asserts that it’s not one
moment, it’s the second a product or feature is ready to be
shipped. This could even be as small as a silent launch. An
example of this type of launch could be as simple as putting a
landing page up that collects email addresses to test if target users
are responding to your company’s value proposition.

Your idea will constantly be changing. This is the second half of

launching fast — iterate and keep shipping. It’s a big mistake to
treat a startup as merely a matter of implementing your brilliant
initial idea.

If you have an idea right now that you’re considering working on,
validate it as fast as possible with a silent launch. You can do this
for under $15 and in less than 2 hours.

Steps:
1. Come up with a name
2. Buy the domain from GoDaddy
3. Come up with a short company description for your target
audience (Not an investor pitch, here’s the difference according
to Michael Siebel, CEO at YC)
4. Create a landing page (try using a product called Ship by
ProductHunt)
5. Make sure you have a contact widget, and a clear call-to-action

Share this with your intended target audience through friends,

social media, Linkedin, or any other way you can think of. The idea
is to test, iterate, and get feedback from users.
3. Speak to lots of users
You’re building your product to solve a problem for a set of
customers. If you don’t speak to them regularly, you will be
misaligned with their shifting needs and might be building
something they don’t need or want — this is a waste of finite
resources (time and money).

By speaking to customers, you achieve a few key

things.
1. You understand them better
2. You understand how they currently solve the problem (i.e. how
valuable your product is)a
3. You understand how/when/if they use your product
4. You build loyalty and maintain a direct connection with them

If you’re in the idea phase of your startup, reach out to people you
envision using what you plan to build and take them for a coffee.
When asking questions, make sure to:

1. Talk specifics, not hypotheticals

2. Listen to them, and talk less
3. Take notes

Here are 5 examples of questions you can ask:

1. What’s the hardest part about doing *that problematic thing
you’re solving*? (helps identify the most crucial thing to solve)
2. Tell me about the last time you encountered that problem
(reveals frequency and degree of the problem)
3. Why was that hard? (shows how you can solve it)
4. What, if anything, have you done to solve this problem? (shows
what competitors they use, or if they choose apathy instead)
5. What don’t you love about existing solutions? (insight as to
how you create competitive advantages)

4. Craft your story

As the founder, you’re the head of vision and storytelling. At the
early stages of your startup, a good, concise, pitch narrative will
excite and compel people to get behind you and your idea more
than just numbers.

Investors see plenty of great growth curves and revenue figures.

And unless you’re Mark Zuckerberg pitching Facebook, the odds
are that won’t make you stand out.

A story and vision for the future is what makes people remember
you and bring them to conviction.

When crafting your story, a key insight is that people respond

better to solutions compared to problems. This is due to problem
fatigue, a phenomenon where people get so acclimated to hearing
about the problem it no longer interests them as much.

Solutions, on the other hand, invite people to be a part of what

you’re selling, it motivates and excites — it creates hope. It’s an
invitation to work together!
Your story needs to highlight the problem and make it relatable to
who you are talking to, but emphasise the undeniable future that is
going to exist because of what you are making.

5. Test your hypotheses quickly

Building a business is like running a science experiment. You need
to treat it as such by following the scientific method. As with any
experiment, you are trying to prove something as either true or
false. With a startup, you need to test and validate your hypotheses
(assumptions) as fast and reliably as possible.

According to “The Lean Startup”, by Eric Ries, there are two vital
assumptions to any startup that you need to be validating.

The Value Hypotheses:

The product/service we are building adds value to our customers.

If you’re not testing this, you have no idea if you are either solving
a problem worth solving or building the right solution to it.

The Growth Hypotheses

This is a test of how new customers will discover your product or
service.

Your growth hypothesis needs to explain your business’s strategy

for obtaining and retaining customers so it can eventually
transform those customers into a sustainable source of cash flow.
A startup is differentiated from a small-medium sized business
based on the premise that it can scale. As a founder, you need to be
experimenting with how you will acquire customers, and
validating things like:

1. Are my expected growth channels viable? (am I investing in the

go-to-market strategy)
2. Is my CAC viable? (am I going to run out of money or not
getting new customers)
3. Is my product sticky? (do I have good retention rates)

A startup is contaminated with risk and uncertainty. Your job as a

founder is to de-risk the investment, not only for yourself, but for
your team and future investors too. It is crucial to understand and
validate both your value and growth hypotheses before moving
ahead with execution (and risking burning through cash and
time).

6. Ask for help

One of the best lessons I learned from my uncle (and co-founder),
is that the smartest man in the room is the one that can learn from
anybody.

It doesn’t matter where you are in your journey starting a

company, no one is too good to ask for help and anyone could
stand to benefit by simply asking. There are huge communities of
founders and entrepreneurs out there who are more than willing
to help wherever they can. After all, they’ve been where you are
and value being able to share their experience and know-how.
Ask friends, family, colleagues, or broader communities such as on
Facebook pages for help reviewing your landing page, helping with
your pitch, or introducing you to some investors or potential
customers. Just ask, and I guarantee someone will help out for
free.

7. Do things that don’t scale

The science of business is doing things that scale, but the art of it
is doing things that don’t.

In the early days of Airbnb, Brian Chesky and his co-founders

personally went around New York City to take photos of their
host’s locations in order to provide travellers with a better booking
experience. This was not scalable and they certainly don’t do that
today. A similar story lies with Uber. In their upstart days, Uber
manually matched drivers to passengers using just basic phone
GPS, Excel sheets, and humanly sent SMSes! No fancy algorithms
at all.

The benefit of doing these unscalable tactics, besides creating

founder-user connections, is that it helped them validate that this
was worth doing without investing in expensive technology to do
this at scale.

All your experiments in the early stages do not need to be scalable.

Scalable solutions take more time and resources to build and
implement — two commodities you likely don’t have.

One thing that Paul Graham emphasizes is that you should focus
on having exceptional customer support. He says, “Go out of your
way to make people happy. They’ll be overwhelmed; you’ll see. In
the earliest stages of a startup, it pays to offer customer service on
a level that wouldn’t scale, because it’s a way of learning about
your users”

Think about something you are planning on automating in order

for it to serve many users. The truth is, you probably don’t have all
those users yet and can suffice with cheaper, more guerilla tactics
before building something more robust.

Don’t be afraid to get your hands dirty, you’ll learn a ton by doing
something inefficiently.

8. Know how you will make money

You need to have a simple revenue model that explains how you
get cash into your bank account in exchange for the value you are
giving users. Remaining free until you have millions of users and
ad revenue to pay your bills is not a luxury you have or an answer
that will likely get you any investment.

Cash is king. You need it to pay your team, bills, and hopefully
sooner rather than later, yourself.

What’s your business model

Here are some examples of business models in the tech space,
each having different metrics you should be tracking.

Enterprise

You sell your software to other businesses on a single-license

basis. These contracts have fixed terms and designated contract
values.
SaaS
Here you’re selling cloud software-as-a-service through a
subscription model (could be annual or monthly terms)

Usage-based
You’re billing your customer based on their usage of your product
or service over a given period

Subscription
A subscription company sells a product or service, usually to a
consumer, on a recurring basis (monthly or annually)

Transactional
You collect a fee for enabling a financial transaction on behalf of a
customer

Marketplace
With a marketplace, you collect a percentage of the total
transaction value in the sale of a good or service that goes through
your intermediary platform

E-Commerce
An e-commerce company sells physical goods online.

Advertising
An advertising company offers a free service to consumers and
derives revenue entirely, or predominantly, from advertisers.
Common advertising companies include social networks, content
sites, and publishers.

Hardware
You sell physical devices to consumers or businesses.

9. Price your product correctly

When pricing your product, you need to consider three variables:
price, cost, and value. And the price is not what’s important, it’s
understanding your value.

Kevin Hale, a YC partner, led a fantastic lesson on startup pricing.

The biggest takeaway is best illustrated by this diagram.
Photo From Kevin Hale’s Lecture Slides

This shows that you are making your profit between the price you
are charging for your product and the cost to produce it. The
greater your profit margin, the greater your incentive is to keep
selling it, and the more you can further your operations. Value is
how useful your product is perceived to be by your customers or
how much people want it. For instance, if you’re selling a SaaS
product for $100 per month, but it enables your customers to
make $1,000 per month, your value is $900. The more value you
create for your customer, the more you can charge.

You can be selling your Enterprise product for $10,000,000 a

month if you know it yields $15,000,0000 in value to the
customer. Value can justify any price.

Another thing startups need to be cautious of is not

underestimating your costs. Be continuously testing and
optimizing your prices to find the best conversion rates.
If you’re going to be looking to raise institutional money, you will
likely have to justify a $1B valuation at some point — so here’s the
billion-dollar valuation formula to consider when pricing.

$Price x #Customers = $100M revenue per year

10. Become a master of coin

A startup needs to be cheap and efficient. The goal is to reach a
point where you’ve validated your idea, and made something that
people want, use, and are paying you for. Most startups fail before
making it to this point of product-market-fit, and the most
common reason for failure is running out of money.

You need to be extremely frugal with your spending and vigilant of

all the money coming in and going out. This is known as your burn
(rate of going through cash in the bank), and your runway (how
long until you have no more money). Your runway is how much
time you have to build something people want enough so that your
money-in is greater than money-out.

By being cheap, you run lean and will be spending on only those
things that contribute meaningful value.

You need to be radically truthful with yourself as to where you

stand and embrace reality. Cut unnecessary expenses and give
yourself the best chance at reaching PMF, as well as
reaching default alive status
11. Prioritize your time, and make you
time
Time is scarce. If you don’t have a tactical way to use it, it will use
you. As a founder, you need to focus on tasks that have the most
impact in your startup but also be sure you allocate time for your
personal hobbies and self-care.

For instance, are you making time for:

1. Exercise
2. Family
3. Romantic partners
4. Friends
5. Hobbies
6. Sleep
7. Startup

All of the above are important and you need to make sure you are
making time for the things that matter beyond your startup. If the
only thing consuming your time is work, then you will face
burnout (an issue faced by 50% of founders) and risk resenting
your choices. Your startup certainly requires a great deal of your
time, but your health and well-being are arguably more important.
You need to be making time for those other pillars.

Real vs fake progress

It’s easy to get caught up doing tasks that are quicker to get
through yet don’t actually tick the needle for your business. These
make you feel like you’re making progress because you’re
physically moving through your task-list, but this is just delivering
points to your ego.

You want to be focusing on more complex tasks that deliver real

value to your users.

This requires task prioritization, where you look at two

components.

1. The impact of the task on your monthly/weekly goals (rank as

high, medium, low)
2. The complexity of the task (rank as high, medium, low)

Focus on the high/easy and high/medium tasks first as they

deliver the most value. Make your way through your priorities this
way until you’re doing the low/low tasks.

A popular principle related to this is the Pareto Principle, which

suggests that 20 percent of your activities will account for 80
percent of your results.

Avoid distractions
Nothing kills startups like distractions. The worst types of
distractions are those that pay money: day jobs, consulting, or
profitable side-projects.

If you want your startup to succeed, it needs all of your workable

hours. If you have other calls coming in or tasks that can pay you
immediately, you will be interrupting your time and progress
toward building something that probably has more long-term
potential. The moment you can afford to be full-time and leave any
other job is the moment you should.

According to Elon Musk, the biggest productivity hack for task

prioritization is using a calendar instead of a to-do list. The reason
behind this is it forces you to be more focused and accountable
with the use of your use of time. Each week, take a couple of
minutes to allocate time for yourself (i.e gym), schedule a few calls
with friends and family, and then schedule time slots for tasks on
your list.

12. Start with a good co-founder

The success of a startup is always a function of its founders.
Everything about your startup can be changed easily, except for
your co-founders. Choosing who to partner with is the single
biggest decision you will make.

As a founder, you are embarking on a very long and hard road.

This is not something you want to do alone. There’s a myriad of
reasons why you should want, and need, a co-founder. Here are
three:

1. Someone next to you when the going gets tough (and good!)
2. Someone to complement your skills and experience
3. Diversity in leadership and opinions

Don’t worry about giving away equity to a co-founder. If you are in

the early stages, your company is worth nothing anyway. Plus, by
bringing on a co-founder, you drastically increase the chances of
success, thus making your equity worth something.

If you’re non-technical, it’s wise to bring on someone who can

write code for you. Choose someone you know and trust.

Assess your strengths and weaknesses, and evaluate what skills

you want your co-founder to bring to the team. Don’t just pick a
roommate because he’s your friend, you need to be able to clearly
define your roles based on skills and experience.

Here’s Michael Siebel on how much equity to give away, and how
to find a technical co-founder

Final words
Becoming a founder is hard and will truly push you to your limits.
The peaks are high and the troughs are low, but the experience you
will gain along the way is irreplaceable. Even if your startup fails,
you’ve invested in your biggest asset — yourself.

Learning is the key, and the best way to learn through your
journey is to continuously ask hard questions and practice
vigorous feedback loops.

The biggest takeaway from Startup School that I’ve seen in

practice is the value of understanding your users. The reason your
startup needs to exist is to create wealth.

As PG says:
“The dimension of wealth you have most control over is how
much you improve users’ lives; and the hardest part of that is
knowing what to make for them. Once you know what to make,
it’s mere effort to make it, and most decent hackers are capable of
that”

Starting your own venture isn’t easy, and there will be times where
things all seem stacked against you, like nothing is working and
it’s all a mistake. Believe me, no ride just goes up. Also, as hard as
it may be, getting comfortable with the fact that this idea might
not be “the one” is important — because your first one probably
isn’t. As long as you are constantly honest with yourself, you’re
asking hard questions and seeking objective truths — you will be
fine.

Remember, you can always pivot.