Business of Startups

My Story

2006

• http://paulgraham.com/mit.html
• http://paulgraham.com/startupmistakes.html

PG's tips for startups

• People over product
• Iteration over perfection
• Great execution over great idea
• "Build something people want"
• Scratch your own itch
• Launch fast/fail fast

Y Combinator

• 8 startups in Summer 2005 to 84 startups in Summer 2012
• http://yclist.com/
• Dropbox, AirBnb: $10 billion
• 17 acquisitions for over $10 million

Noteleaf

Start X

Demo Day

VC

Game Closure's Start X class

• 13 companies
• 4 acquisitions
• 3 series A rounds

Startup Life Cycle

Pre-existence Stage

• Bootstrapping: running on savings or day-job
• Boostrapped business: 37 Signals "bootstrapped, profitable, and proud"

Early stage

• Get incorporated, divide equity
• Incubator, accelerator
• YC standard: $120k for 7% equity ($1.7M)
• Challenge: gather evidence for business model (100 users)

Funded stage

• Seed round: $50,000 - $2 million
• Friends & family + angel investors
• Angel list
• Kickstarter: Oculus Rift, Soylent, Pebble
• Challenge: initial traction (10,000 users)

Middle Stage

• Series A: $2 million - $20 million
• Series B: $10 million - $60 million
• About 20% of seed funded startups get series A
• Each round takes ~20% of equity
• Risk reduces each round: about half at this stage fail
• Challenge: scale traction (1,000,000 users)

Profit Stage

• Don't need more money to stay alive
• May raise money anyway to grow and lock in competitive advantage (Github's $100M)
• Challenge: own the market

Exit

• Acquihire: Posterous -> Twitter (~$7 million)
• Acquisition: Heroku -> Salesforce.com ($250 million)
• IPO: Google (raised $1.67 billion at $23 billion valuation)
• Never, stay private: 37 signals
• Die... ~80% startups

Startup Economics

A great tech company

• Creates lots of value
• Lasts a long time
• Captures some of the value it creates

Power law

• YC: top 2 companies (from over 500) = ~90% of YC returns
• Peter Thiel: top 1 company worth as much as rest of Founders Fund 2005
• VC Challenge: Don't miss the big hits!

Marc Andreesen

• 4,000 companies look for VC funding every year
• 400 get funded by top-tier VC
• 15 account for 90% of returns
• Okay to invest in lots of losers for one 1,000x winner

The "Unicorn Club"

• 39 billion-dollar US tech companies in the last 10 years
• http://techcrunch.com/2013/11/02/welcome-to-the-unicorn-club/

Peter Thiel's startup sweet spot

Own your market

• Avoid competitive markets - ex. Restaurants
• Valuable startups have a competitive advantage
• brand (clothing, colas)
• scale cost advantages (Amazon.com)
• network effects (twitter)
• or proprietary technology (Paypal fraud detection)

Total Addressable Market

• Who cares if you own a market if it is tiny...
• example: US Advertising $144B/year

Customer Acquisition

• CLV = customer lifetime value
• ARPU = avg. revenue per user per month
• r = retention rate (per month)
• ACL = average customer lifetime = 1 / (1 - r)
• CPA = cost per acquisition

Exponential Growth

• "rule of 72" - doubling period is 72 / growth rate
• doubling adds up quick!

Virality

• K-factor: how many new users does a new user bring in
• K-factor over 1 for true viral growth
• Viral cycle: how fast does it happen
• see: http://www.forentrepreneurs.com/lessons-learnt-viral-marketing/

Retention

• Change in 90-day retention reflect the health of the business
• Other health metrics: Monthly Active Users, Daily Active Users, DAU / MAU

Stock Options

• Typically, founders keep 80% of equity and award 20% to employees
• Typical 1st employee: 1.0%. 20th employees: 0.1%
• Working at a startup vs. founding - better salary, less risk, less equity
• But to be Facebook millionaire, only needed 0.001% of company
• Most grants vest over four years

Startup trends

Early stage funding growth

Series A crunch

Software is eating the world

• Phrase coined by Marc Andreesen
• Software startups taking over non-software industries: Uber(taxis), Homejoy(home cleaning), Amazon(book stores)
• Previously: music, entertainment, telephony, retail, advertising, classified ads, encyclopedias, maps
• Possible future: entire financial industry (bitcoin), education (coursera), health (distance medicine), contract law (ethereum), travel (Occulus), taxi/trucking/railway (self-driving cars)

Mobile is eating the startup world

Breakthrough technologies

• "Sci Fi" tech
• Bitcoin, Artificial Intelligence, drones/robotics, 3D printing, VR, applied genetics, living forever...
• Calico, Google X, Elon Musk, YC request for breakthrough startups: http://blog.samaltman.com/new-rfs-breakthrough-technologies

Hardware is back

• Due to crowd funding platforms (kickstarter, indiegogo) and easy to use prototyping hardware (arduino)
• ex. Occulus, Pebble, Soylent

Internationalization of startups

• YC taking startup school global
• 22 companies in last batch

Books about founders:

• Founders at Work
• In the Plex
• Steve Jobs
• The Hard Thing about Hard Things
• Zero to One (or the Thiel lecture notes: http://blakemasters.com/peter-thiels-cs183-startup)
• Hackers and Painters
• The Tinkerings of Robert Noyce