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Jacob Ruiz

Product Designer
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How to Evaluate Startup Ideas

September 1, 2020

Nobody knows how to evaluate startup ideas better than Y Combinator. YC partner Kevin Hale gives an excellent framework for assessing if a startup idea has potential to grow quickly.

Summary

  • Your startup idea is a hypothesis about why you will grow quickly.

  • This hypothesis is made of up three things:

    • Problem: What is the setting for this company that allows it to grow quickly?

    • Solution: What is the experiment that you're running within those conditions for it to grow quickly?

    • Insight: What's your explanation why your experiment is going to be successful?

  • Always start with the problem. Don't be a solution in search of a problem.

  • You need an unfair advantage. You want at least one of these:

    • Founders: Are you 1 in 10 people in the world that can solve this problem?

    • Market: Is your market growing 20% a year? This is one of the weakest advantages to have because it's not unique to you.

    • Product: Is your product 10x better than the competition?

    • Acquisition: Paid acquisition is bad. Word of mouth is best.

    • Monopoly: Do you get stronger as your company grows? Marketplaces and network effects.

Hale goes on to apply this framework to two startups he knows well: Y Combinator and Wufoo.

Example 1: Y Combinator

  • Problem: Hard for founders to raise money without knowing someone in venture capital.

  • Solution: Y Combinator invests in companies through an open application.

  • Insight / Unfair advantage:

    • Founders: YC founders had outstanding accomplishments and knowledge of the space. First worm. LISP textbook. First SaaS company.

    • Market: They saw that future billion-dollar companies would be technology / software startups. Software startups need less money than traditional companies.

    • Product: Covering 3 months of living expenses is enough to attract hackers. They want to do this. No coworking space is needed. Other angels and VCs want to invest in these startups.

    • Acquisition: Paul Graham wrote books and online essays with a large audience of target users: hackers. Building an audience is a massive advantage.

    • Monopoly: They didn't realize this at the time, but the YC alumni network became more valuable than partners. Easier to recruit. Scales advice. Better beta.

Example 2: Woofoo

  • Problem: Websites need to collect custom information, but you need to know how to code or hire a programmer.

  • Solution: Wufoo is a WYSIWYG online form builder that lets non-technical people create forms and surveys.

  • Insight / Unfair advantage:

    • Market: Almost every website needs to collect data.

    • Product: WYSIWYG + AJAX is 10x faster than direct competition. 100x cheaper/faster than hiring a developer.

    • Acquisition: Wufoo started with an audience of 100K developers. They built this audience by blogging for a year. Wufoo forms can be embedded on a website and Wufoo brands the confirmation page, meaning users refer Wufoo to their users automatically.

You can watch the talk in full here:

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