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: