How To Start a Billion Dollar Business

i'm going to share the 10-step process that i've used to create companies worth more than 300 million dollars and at the end of this video i'll give you a link to download my free worksheet guiding you through this process it's hard-won knowledge from 15 years of starting technology companies in silicon valley distilled down to the essence i call it the quintessential startup playbook i'm ryan giuliani i'm a technology entrepreneur and investor and i've also spent the last decade on a journey of spiritual awakening and seeking deeper truths this channel is about quintessence where we go deep on the topics of business spirituality and life mastery this is the first video in a series on starting high growth technology companies the type of companies that have the potential to reach venture scale and be worth billions of dollars i had to learn this stuff the hard way and this is a playbook built from the trenches it's the same playbook used by the best entrepreneurs in silicon valley they may call it by different names but this is the core essence of what i have done over the five companies that i've created and what i've seen work with the hundreds of entrepreneurs that i've advised from my angel investing and my time spent as a part-time partner at y combinator so in this video i'll outline the 10 steps in the playbook and the rest of this series will have a deep dive video on each step now the truth is as we dive deeper into any one area of this playbook you'll see there's a never-ending fractal of subtlety and complexity that's where a lot of the fun exists for me and if you're on this journey i'd love to answer your specific questions about the challenges and the struggles that you're facing so please leave them in the comments or message me directly so i can address them in future videos and so without further ado here is the quintessential startup playbook there are 10 steps i'll spend a couple of minutes on each one in this video to frame what we'll be covering in the deep dives idea generation team formation market and competitive landscape analysis customer development prototyping first customer test iteration period objective company evaluation fundraising and growth and scaling let's get into it there's a romantic vision that inspiration for the perfect startup idea strikes randomly like lightning maybe while you're in the shower or the bathtub the classic eureka moment and while this does happen occasionally it's not repeatable or systematizable so we can do better the secret to repeatable startup idea generation is domain expertise which means you deeply understand a particular domain industry or field of knowledge much more than the average founder if you have domain expertise from your past work experience or studies go build something for that industry where you have an edge where you can see opportunities and the secrets that others can't if you don't have it then here's the next secret you can easily and systematically develop domain expertise using industry insiders there are thousands of people who have been working in middle or upper management jobs in almost any industry and have become experts achieving the ten thousand hours of mastery and they know all about the problems with their industry that need to be fixed in fact it's probably their favorite thing to talk about so go talk to them you'll be surprised at how willing people are to open up to you in all of these conversations you want to be on the lookout for problems and not solutions you are there to understand the pain points and then later you will apply your entrepreneurial mind to finding the solutions you'll generally have better success coming up with solutions when you are on your own because it's actually a competitive advantage that you're an outsider full of naive optimism and not bogged down by industry dogma and the way things have always been done you've probably heard the old quote often attributed to henry ford if i had asked people what they wanted they would have said faster horses after a few conversations with industry insiders and some brainstorming at home you'll quickly open up the floodgates of potential new startup ideas so the next skill you will need to develop is judgment and discrimination to figure out which ones are actually worth pursuing this is a skill that's developed with practice over time but for now you want to ask yourself how painful is the problem that you're solving there's a cliche from the venture world that asks are you selling aspirin or vitamins meaning are you solving a pain that is clear strong and immediate or is it more aspirational and nice to have the famous vc firm sequoia capital looks for companies whose target customers have their hair on fire meaning they're desperate for an immediate solution and they don't care how ugly it is of course there are exceptions to every rule of thumb and there are certainly great companies that have been built that didn't solve a hair on fire problem often consumer or entertainment companies where the pain they solved or the value they created only became obvious in hindsight once you have an initial sense of the idea you're going to pursue you should start building your team this is an ongoing effort that will continue for the life of the company but at this stage you'll focus on the founding team there's no strict definition of founder of a company but it's generally someone who was working on the company from the very beginning prior to raising any external capital and owning a significant share of the equity usually at least 10 percent later when you have money you'll hire non-founder employees who usually own much less equity than the founders two or three founders is most common for venture-backed startups but there are of course many exceptions including successful solo founders the guiding principle is to build a team where you can comfortably answer the question why are you the best team to pull this off said another way if there's a team working on this exact same idea right now why will your team win as you think about answering that question use the three c's coverage complementary and compatibility imagine a venn diagram with a circle representing all the skills you will need to make this startup successful this could include domain expertise technical skills sales and deal making skills marketing community building finance operations the list goes on and will be specific to your startup now imagine drawing a circle for each member of the founding team coverage means that you have all of the skills that you need covered if there are any significant gaps you should look to bring on advisors or have a clear plan to hire early employees complementary means that there's not too much overlap or redundancy on the team each person brings a distinct and complementary value this will make it easier to assign responsibility and ownership as the company grows i would also include diversity under this point has been shown that teams made up of people from diverse backgrounds and cultures often make better decisions lastly and perhaps most importantly compatibility means that the team shares a consistent vision and philosophy for the type of company they want to build is the primary objective to make money would have an impact do you want to build a multi-billion dollar public company a profitable lifestyle business something you can flip quickly for 50 million dollars in a few years and what type of company culture do you want to build compatibility also includes understanding the different personality types of the founders and the preferred modes of conflict resolution which i'll cover more in a future video you can work through the first two c's with an open honest and rational analysis of the team's skill set and experience compatibility however is more tricky and is best understood through years of prior history working together in fact there's a huge risk in embarking on a co-founder relationship with someone that you don't know very well think of it like marrying someone you've only just met sure it could work but the chance of failure is high once you have an idea and the beginnings of a team you'll now begin the process of validating that idea validation progresses in stages each requiring increasing time and resources and so we begin with the easiest which is an analysis of the market and competitive landscape the question we ultimately want to answer is can this become a venture scale business which means the company has potential to be worth at least a billion dollars and ideally much more as a side note when early stage investors look at your business and they are trying to answer the same question they typically focus on four key elements team market product and traction i already covered team and i'll assume at this early stage that your traction is zero so in this step we're looking for a good answer to market and product the two things we want to know about the market are size and growth rate size of the market basically means how much money could you make each year at scale if you were the sole monopoly provider satisfying this entire market need in reality there will of course be competitors so you will only capture a small slice of this money you can calculate market size in two different ways hopefully leading to roughly the same answer top down or bottoms up i'll get into this more in an upcoming deep dive video but very quickly in a top-down analysis you look at market research reports and comparable companies and then apply some segmentation to figure out the potential size of the market that your company will serve in a bottoms-up analysis you build a model starting from some basic assumptions like how many total customers could your company have per year at scale and how much could you charge them you multiply these two numbers together accounting for different customer types and different revenue streams and you'll arrive at the size of your market now market size alone is not a useful number without the growth rate which you'll have to estimate based on early data and trends that you're seeing it's generally better to focus on a market that is small today but it's growing fast than a market that's already very large but the growth rate has slowed or is contracting the next thing we want to know is how your product idea compares to what is already in the market if anything what is your unique product differentiation and positioning this means you'll want to research existing and potential competitors and also substitute products that satisfy the same underlying need but in a different way some of the main sources of data you'll use for all of this analysis are market research reports conversations with industry insiders and direct customer interviews by this point you should have a good understanding of the pain that you're solving where your solution fits relative to the existing landscape and how big your company could be if everything goes to plan if your idea still looks promising you now proceed to customer development this requires more time and effort than the previous analysis step but will give you much more accurate results of course if the data from your market analysis doesn't look promising you should fail fast and go back to step one think of a new idea i know this is not easy when you're emotionally attached but startups are hard and all-consuming make sure you spend your time money and energy on something that has the highest chance of succeeding use your best judgment combining intellect and intuition and be honest with yourself so customer development is a term coined by steve blank and you can read more about it in his book the startup owner's manual the idea is that in the same way companies have a product development function they should also have a customer development function where we develop our understanding of our target customer what they want and we learn how to sell to them as usual we have a deep dive video coming but the core principle is nicely summarized by this quote from steve facts exist outside the building opinions reside within so get the hell outside the building this means go and talk to your potential customers directly to find out the truth begin by opening a new document and write down all of your hypotheses about your business what things have to be true in order for your business to succeed what do you believe about the world and your customers make sure you include the pain they're feeling and the ways that they're solving that pain today how much they'd be willing to pay to solve the pain and the pricing model you'll be using for your product how they'll learn about your product their decision making process for making a purchase how you will market sell and distribute your product and much more be comprehensive next like a scientist you're going to conduct an investigation in the form of customer interviews to prove or disprove these hypotheses with real world data identify the different sets of people you'll need to speak with and create structured questionnaires of things you would like to ask them and be systematic and objective as you conduct your customer development interviews you can do these interviews in person over video chat or by phone or worst case by text or email it's better to aim for in person as much as possible because you'll often learn more from body language than from the words that they say ideally you want to collect at least five data points confirming a hypothesis before you mark it as valid but know that you will always be operating under some level of uncertainty this process can feel very time consuming and you may have resistance to doing it but it's nowhere near as time consuming as building a product and then discovering that no one wants it once your hypotheses are sufficiently validated it's then time to think about building you may be surprised to see that we're almost halfway through the playbook and haven't even talked about building the product yet this is very intentional as a founder you're probably super excited and passionate about your idea it's the thing you love talking about you can't wait to start building it as a result a very common mistake founders make is to spend almost all their time in the early days building and then find themselves caught off guard when they eventually release the product and discover that no one actually wants it so you actually need to over index in the other direction to force yourself to hold off doing any building until your idea is sufficiently validated and ideally until you have customers lined up cash in hand ready to buy at this point the playbook is no longer strictly linear but starts to include parallel paths and loops prototyping begins and customer development continues in parallel because sometimes in order to get the answers you need from your customer interviews you have to be able to show them something but always keep in the back of your mind the principle of maximum results for minimum effort you want to learn as much as you can as fast as you can while investing as little time and money as possible so how much fidelity do you need in your prototype to get the answers and learnings is it enough to simply talk about the details of your idea do you need a napkin sketch some polished design mock-ups fully interactive and functional piece of software each increasing level of fidelity not only requires more time and money to develop but also comes with greater risk of waste if you learn that you need to change something fundamental you may be wondering how to fund this prototyping in the early days before you have money almost all levels of prototyping for a typical software business can be done today using no code tools so even if you don't have technical experts on the founding team you can prototype and validate your product well before needing to hire any engineers and when you do need to hire for custom or complex work you can often start out using contract engineers from low-cost outsourcing websites well before you need to hire a full-time team as a side note if you are lucky enough to have a lot of money be wary of overspending frugality as a mindset is a competitive advantage it can lead to more creative solutions and will put your business in a stronger position in the future in the event of a market downturn or other unexpected event it's finally time to subject your precious embryonic startup to the harsh criticism of the real world it's time to make your product available to real customers or users if you've executed the customer development process correctly you should already have a set of customers or users that can't wait to get their hands on your product so finding your first customer shouldn't be too hard but putting your product into your customers hands is legitimately scary and your perfectionism will cause you to do this much later than you should i can almost guarantee it unless you've done this before and learned this the hard way as reid hoffman the founder of linkedin once said if you're not embarrassed by the first version of your product you've launched too late during my time at y combinator the one thing founders said consistently after they launched is that they had wish they had done so sooner so just do it don't let the perfect be the enemy of the good founders often ask whether they should charge money for the first version of their product and for most businesses the answer is yes you'll have to start charging customers eventually you may as well start building that muscle now but more important than that you will learn a whole lot more if customers are actually paying for your product it's easy for a customer to say nice things about a product they got for free but when they're shelling out their hard-earned cash the feedback has a lot more truth to it let's talk a little more about collecting feedback you should collect both quantitative and qualitative feedback from these early customers and users in a systematic way instrument your product with analytics tools to collect quantitative feedback and find ways to survey your users for the qualitative information one of the best things you can do is collect contact details of your users and then call them you may already have a relationship with these early users from your customer development interviews so these conversations should be an easy extension of that process but if you are contacting a user for the first time you can say something like hi i'm the founder of company x and i'm trying to build the best thing in the world for solving problem y this is only our first attempt and you're one of the very first people to use it i know it's not great yet and i'd love to hear directly from you what we can do to make it better if you frame it this way they should be more than willing to let you know what they think and here's an important trick try and avoid getting praise as much as possible while it does feel good psychologically what you really want to know is how to make the product better you want to know what they don't like about it most people are very resistant to giving constructive criticism you have to get really good at reading between the lines you need to learn to distinguish yeah i like this from holy this is the thing i've been waiting for can i give you my credit card right now you need to learn how to distinguish the difference between those sorts of answers you're now in an iteration loop this is the evolutionary process by which your amoeba-like startup begins to mutate and evolve and take on its final form you rapidly iterate on the product by taking in key learnings from your customer feedback developing updated versions of your product and then proceeding to collect feedback again this will be a very fast cycle at first and as you start to get more customers more employees and more structure in your business it will necessarily start to slow down you should aim to keep this cycle as fast as possible for as long as possible because the thing you want to optimize for in an early stage startup is speed of learning it's highly unlikely that your first attempt at building the product hits the mark perfectly the startups that win are the ones that can learn and adapt the fastest learning exactly what the market wants and then delivering it this has come to be known as product market fit and the search for product market fit is where you will spend most of the early months and years of your company's life another piece of advice here which may be counter intuitive to some of you is that it's much better to find a small group of customers or users that absolutely love your product than it is to find a large group of people that are less satisfied this is like the 1000 true fans concept coined by kevin kelly or as paul graham the founder of y combinator said ideally you want to make large numbers of users love you but you can't expect to hit that right away initially you have to choose between satisfying all the needs of a subset of potential users or satisfying a subset of the needs of all potential users take the first it's easier to expand user-wise than satisfaction-wise if you find yourself in the iteration period for a long time and you're still not seeing signs of exponential growth in some important metric ideally revenue it's time to ask yourself the hard question to pivot or not to pivot i wish i could give you a simple formula to answer this question but unfortunately this is more art than science and will require you to bring all of your intellect and all of your intuition to the table there's a goldilocks zone here and it would be a failure to pivot either too early or too late if you knew with certainty that your idea was going to fail it would be much better to pivot early you'll have saved time and money that you can use to test new ideas you'll have avoided hiring people onto the team that may no longer be needed and perhaps most importantly you won't be too emotionally invested yet so it will be psychologically easier to make the change however if you do just give up and pivot at the first sign of trouble you can end up in a vicious cycle of believing the grass is always greener on the other side of the fence constantly switching ideas then encountering obstacles and switching again until you run out of time money and motivation i've seen companies die by not pivoting when they should have and i've seen companies die by pivoting too early and entering this vicious pivot cycle in fact i've been in both situations myself with my own companies this stuff is hard so if you're facing the decision to pivot be as objective as possible lay out everything you know about your company in a structured way in the description below i'll link to a company evaluation worksheet that i use for my companies pull together your trusted mentors or other successful entrepreneurs and investors that you know and take them through your analysis hold a mini board meeting and get their feedback on whether they think you should proceed or pivot and if you truly don't have anyone to help you make this decision shoot the evaluation worksheet over to me and i or someone on my team will do our best to give you some honest feedback okay step nine if you made it this far it's time to think seriously about fundraising i didn't talk about fundraising earlier in the playbook because if you can afford to wait it's better to raise funding after you have some early signs of traction and product market fit because you'll get a higher evaluation the strategies and tactics of fundraising is a very detailed and complex topic and i've got a whole video series planned for you on that so for now i'm just going to cover a few key points first should you raise money there are a whole lot of companies that grow organically and profitably without ever raising external funding the founders own 100 of the company they're completely in control and they don't have to answer to anyone this is pretty great so there would have to be a compelling reason why you would sell part of your company to external investors the main reason is so you can grow faster usually by hiring a team or spending more money on customer acquisition this is very important in winner take all markets where it's barely lucrative to be in second place let alone third another reason maybe that you're in a very capital intensive business like developing a new drug or building an airplane that requires tremendous upfront spending before seeing any revenue other lesser important reasons are things like having the brand of the investor associated with your company which can sometimes help with recruiting and pr and maybe even customers and occasionally if you pick a very good partner with solid operating experience or experience investing in a lot of companies similar to yours and having their advice around the table could make a meaningful difference to your company's success but in all honesty while this can happen it's rare and often the only value-add investors bring is the money itself so if you decide to raise money how much should you raise there's a goldilocks zone here too you want to avoid raising too little or too much this is the most expensive money you'll ever raise if all goes to plan so you really need to think through dilution and how your ownership stake will play out over the life of the company i've seen y combinator of founders who suddenly became a hot deal after demo day decide to raise a massive seed round and then a few rounds later find themselves in the position of owning just a tiny fraction of their company this is a nuanced subject and the counter argument is that it's often better to own a small slice of a very large pie than a large slice of a small pie and of course it's far worse to run out of money than it is to raise too much just do yourself a favor before raising any money build a spreadsheet with some assumptions of how much money you will raise at what valuation over several rounds of funding and see how much of the company you end up owning in the end the guiding principle is to raise just as much as you need to reach the next set of milestones that de-risk the company and allow you to raise more money at a higher valuation or in some cases the next set of milestones could even mean profitability and as we all know plans rarely go according to plan so it's important to build in a buffer my rule of thumb is to raise enough money to last 18 months with a goal of hitting your next set of milestones in 12 months and then leaving a six-month buffer to fundraise and for unexpected circumstances this approach also forces you to build a rough financial model and know exactly how you're going to spend the money that you raise rather than just picking an arbitrary number out of the air like two million dollars as far as the fundraising process itself the key is to treat it like a process plan to switch gears you will not be working on your business as usual plan to meet 50 or more investors over the course of a few weeks which means multiple investor meetings a day and be sure to have several conversations progressing forward in parallel if you try to do it in series speaking to one investor for a few weeks then another or if you try to do it as a side project and don't take proactive control of the process your chance of a good outcome is very low stay tuned for much more on this topic in the future and so we reached the final step in the playbook which like getting a black belt in karate is really the first step you're now in the game and you have a long journey ahead of you paul graham the founder of white combinator wrote an essay about the essential thing that distinguishes startups from other types of companies and that thing is growth your goal if you want to become a venture scale startup is to grow as fast as you possibly can and the best way you can grow as fast as you can is focus startup essentialism focus on the big bets that are going to move the needle ignore everything else it's easy to get distracted doing things that it seems like founders should be doing like going to conferences doing press worrying about office space the best companies put as little effort as possible into things that are unimportant and focus on the top one or two items that will make a real difference to their business usually this boils down to two things building your product and talking to customers you can't go wrong doing those things when you're in the growth phase your challenges and any advice will become more specific and nuanced i've got a whole video series planned within the trench's advice for running a startup but i'd love to hear your specific questions or challenges in the comments below so that i can incorporate them into future videos so that's it that's the quintessential startup playbook don't forget about my free company evaluation worksheet which you can use as you go through this playbook which is available here and linked in the description below and if you're new here this channel is about quintessence where we seek the quintessential truth to master all elements of our lives which includes business it also includes relationships our core purpose happiness inner peace and much more so where do you want to go next if you want to dive deeper into business mastery consider this video from my series on leadership or if you want to switch gears and start dipping your toes into relationship mastery take a look at this video about my all-time favorite book until next time my friends go deep [Music]

2021-01-18 17:06

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