“Startup basics, and why most fail” with Anu Hariharan

Vaibhav Agrawal (Partner, Lightspeed) in conversation with Anu Hariharan (Partner, Y Combinator) on Day 2 of EE2018, 18 Sep. 

Highlights:

• Co-founder conflict is the #1 reason for startup death in first 9-18 months
• Build something that 100 people love vs that 1000 people like
• What product-market fit (PMF) feels like? 1) for b2c things are on FIRE 2) for b2b when you have 1 large customer that wants more and more and more!
• Post PMF CEOs devote up-to 50% time on hiring

Why Most Startups Fail

Co-founder breakup

“CEO is taking all the spotlight, am I as important?”, “Not sure if we’re doing what I wanted, we’re not aligned” are common to hear in early days. Co-founder conflict is probably the #1 reason why startups fail in the first 9-18 months.

You absolutely need to know what each person is bringing to the table. What do you like and, more importantly, what you dislike about each other? Can you be that open and honest? Sometimes putting the company and common purpose first helps – for example, can you get to the point of saying “If I’m not doing my job right, my co-founder should have the ability to fire me so that the company can succeed”?

Lack of Product-Market Fit

Ask yourself – Is there a real need for what I’m building? Am I addressing a genuine pain point? Is my solution only incrementally, or truly 10x better? Most startups fail because the answer is NO.

So how can you find out?

1) The first check is whether what you’re building is solving a problem for you, personally.

2) If users keep coming back, you have engagement, you have love.

3) For B2C startups, PMF feels like things are on FIRE – things will be falling apart, there will be down time issues, co-founders will be annoyed over losing sleep and what not! If everything’s going smoothly, chances are you probably don’t have PMF!

4) For B2B startups, PMF feels like having 1-2 large customers wanting more and more (and more) from your company.

5) Build something that 100 users LOVE vs. that a 1000 that LIKE.

When you just have a handful of users, you can’t measure it in percentages. You need to pay attention to every single user- call them up! Keep making changes, and measuring the impact. “At Airbnb, the team discovered after talking to early customers that photos are an issue. The team quickly moved to uploading high quality professional pictures, and could see immediate impact on week-on-week growth”, Anu illustrated.

Startup basics

Market – no market’s too small

Anu had a very interesting take: “As a founder, don’t ever let investors tell you that a market is small. Investors usually undersize markets – therefore at YC, no company is rejected for having small market size! You’re closest to the problem you’re solving, and are paying most attention to the use case. For Airbnb, the market was zero at the time, but it expanded. For Uber in the early days, many VCs passed thinking the black car market is not big enough. TAM is created, not dictated.”

Hiring – keep the bar high

“Your 1^st engineer will recruit the 2^nd, 2^nd will recruit the 3^rd and so on. If you don’t like the first few, the divergence from what is optimal will only increase as the company grows.” Raise the bar! For all key hires, start thinking about it 6-9 months in advance – if you are hiring a marketing leader, go and meet the 6 best CMOs you can find. While you may not be able to hire them, you will always get a better understanding of what you want in the person you hire. You must evolve from a do-it-all-yourself CEO to spending >50% time in hiring. To clarify, no one gets it right all the time – so be ready to fire a few executives.

Moats – helpful, but not a zero-sum game

Having moats helps you scale faster, and makes it harder for newcomers to dislodge you. Two common moats businesses use:

• Network effects: The more users that use the product, the more valuable it is for others to use it. E.g. social networks and telephones
• Scale effects: At large scale, the cost of supporting each new user is a lot lower. E.g. Amazon and Uber.

In the B2B context specifically, another key aspect often is to find enough hooks (e.g. suite of services, end-user lock in, data etc.) that drive up switching costs for the customer.

Cash – don’t ever run out!

To stay updated, follow EE on twitter here and the official Lightspeed India handle here