Startup = Growth: Paul Graham

Brief summary of the last article from week 3 of How to Start a Startup. This one is basically trying to convey what makes a startup different from a small business. Graham shows that the distinction between a small business and startup is the rate of growth. In order to hit the rate of growth required by startups, you need to have two key ingredients: 1) A product that people want; and 2) To reach and serve all of those people. He talks about a barbershop – it has something people want, but it is not scalable. Scalability is the key, but the product has to be worth peoples’ time/money. Startups, are designed to grow fast, and often fail fast.

Ideas: When it comes to ideas, the constraints that ordinary companies have also protect them. This is the tradeoff: your barbershop only has to compete with the other ones down the road, but if you start a search engine you have to compete with the whole world. Businesses are designed by their niche, and they are protected by it – that is why a local bar (Bar + Neighborhood) is both defined AND protected by its geographical constraint. Startups on the other hand have to think of something fairly novel – something that has been overlooked. “successful startups happen because the founders are sufficiently different from other people that ideas few others can see seem obvious to them.” They find ideas in everyone else’s blind spot. It is a good combination to be good at technology and to face the problems that can be solved by it. Learning coding for example, then you will have the tools to recognize what problems can be solved. There are two connections Graham identified between the startup ideas and technology:

  1. Rapid change uncovers big soluble problems. This means you should stay at the edge of where the rapid improvement is. Ask yourself what markets are currently growing rapidly and you will find big soluble problems.
  2. Startups create new ways of doing things

Growth: There are 3 phases of growth-

  1. Initial, slow period where the startup is still trying to figure out what it is doing
  2. Once the startup figures it out, they start to grow rapidly
  3. Eventually, the startup grows up into a big company and growth slows due to it hitting the limits of the market it serves

If there is one number every founder should know, it is your weekly growth rate. Whether it is revenue, active users, etc. figure out what you can measure as a proxy for growth and set targets. A good growth rate at YC is 5-7% per week. The biggest thing is that it should be your one goal and single focus: “Just try to hit it every week.” if you hit it, nothing else matters that week, but if you miss it, you have failed at the only thing that mattered. This narrow focus can help the founders optimize their path to rapid growth rates and understanding what drives it. The other thing this forces, is that by having a growth number every week you need to hit: “it forces the founders to act. Acting vs. not acting is the high bit of succeeding” And 90% of the time, sitting around strategizing is just a form of procrastination- founders intuitions are usually pretty good when deciding what hill to climb. Optimizing for growth is also known to help discover startup ideas: just like the constraint small businesses have of being located in a particular neighborhood defines the bar, the constraint of growing at a certain rate can define the startup. This is because you will start with a plan and modify it as necessary to keep hitting your growth targets: anything that grows consistently at 10% per week is almost certainly a better idea than you started with. Richard Feynman said “The imagination of nature is greater than the imagination of man” which means that if you just keep following the truth you’ll discover cooler things than you could have ever made up: Graham relates this idea that for startups, growth is a constraint much like the truth: every successful startup is at least partly the product of the imagination of growth.

Value/Deals: Exponential growth is extremely powerful and difficult for people to wrap their heads around. on page 6 there is a good chart of what weekly growth rates translate to in annual terms. For example, a weekly growth rate of 7% is an annual growth rate of 33.7X. The test of any investment is the ratio of return to risk. While startups are risky, they also have the potential to return so much. The other reason VC’s love to invest in startups is that the founders cannot enrich themselves without enriching the investors. From a founder standpoint, why would you give up precious equity to a VC for cash? the reason is that if your idea is good enough, and you don’t grow fast enough, your competitors will. Slower growth is particularly dangerous in industries with network effects. With VC money, you can choose your growth rate.  For acquisitions, why would a company pay seemingly ridiculous “bubble type” valuations for startups? Most acquisitions have some component of fear, fear that the startup is growing too fast and will expand into the acquirer’s territory. This is what happened when Facebook bought Instagram, which everyone said was overvalued.

Overall, if you want to understand startups, you need to understand growth Growth drives everything in this world. Understanding growth is what starting a startup consists of. Starting a Startup is committing to solving a harder type of problem than ordinary businesses do.

RG

 

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