[Timely note! We're hosting a Y Combinator Meetup in Seattle on Thursday Feb 25... details here!]

March 3 is the deadline for YC’s Summer 2010 session. I figured that I ought to throw my thoughts out there on the decisions that lead up to the application, the app itself, and the interview process that follows (if your app makes the cut!).

Making the Decision to Apply

• First off, I think the most important thing to emphasize as an entrepreneur is that you should optimize for your chance of success a meaningful exit, NOT the magnitude of your it should it happen. It may seem like selling for millions to Google is a foregone conclusion given how brilliant you are, but it’s not. Startup success is a tough slog with lots of randomness outside of your control. If you can trade a little bit of equity to nudge up your shot at success by a few percentage points, you should do so. Thankfully, YC from this perspective is a no-brainer. No one can argue that it doesn’t improve your shot (with the amazing mentoring they provide, the investor introductions/credibility, and PR bump), and if you calculate YC’s take is if you sell for $100m (divided by the number of founders), it isn’t too painful.
• Think about what you’re building, what market you’re playing in, and whether it’s appropriate for venture financing. I think I recall reading about someone applying who was proposing to build an app to manage Dungeons and Dragons campaigns. While there’s probably a business there, it’s pretty unlikely that the pen-and-paper RPG market is going to be the next big thing to change the world. Pick a big market– or better yet, pick a small market that can eventually morph into a huge market (like classifieds for San Francisco, selling books online, or an online garage sale).
• Read everything here and make sure you agree with some of it, but don’t be afraid to disagree with some of it either!
• Do something bold. You aren’t going to be thinking to yourself on your deathbed that you really should’ve taken less risks. YC is a blast. You get to meet amazing mentors, other great startup founders, and a few fairly impressive robots.
• Consider how committed you are to your idea/market, your company, and your co-founders. YC has plenty of flips, but the majority of ‘em seem to be going concerns for years. Can you get excited about what you’re doing (and who you’re doing it with) for 7 years?
• Do a gut-check on your team. Do they have the rough ingredients necessary to kick ass? If the better mousetrap you propose to build is going to be better because of an amazing UI, make sure you have a great UI guy. If you’re doing a vertical search/UGC play, make sure someone is at least a little interested in SEO. If you’re going to sell software to businesses, make sure someone is willing to sell stuff. And, of course, if you’re tackling something with big technical challenges (like most of us are) make sure you have some great hackers.

The Application Process

• Read Paul’s essays. It provides good insight into what’s important to him (and YC). Reading Founders at Work is a good idea, too. It’s a great book and shows you some patterns for startup success.
• Remember that the app is a sales pitch and focus your answers on the things that are important to YC. The biggest risks to YC are:
  • That you don’t have the chops to build something good. The best way to deal with this concern is to show them something good that you’ve built. Preferably several things, and preferably things that you’ve built with your co-founders.
  • That you’ll get bored/discouraged and quit. So try to work in examples of times when you’ve persevered despite significant obstacles.
  • That you’ll fail to make something that people want. So do what you can to show that you’re in tune with the market you’re proposing to serve. You can be a badass hacker with unflagging dedication, but if you don’t/can’t understand your users, you’re probably not going to be a big win for YC.
• Don’t be too shy or too arrogant to sell. I remember reading a comment on Hacker News that said, “My code speaks for itself.” No, it doesn’t. At least, not to investors, customers, employees, reporters, and the zillions of other people out there you’re going to have to sell to.
• Get working on your software ASAP. If you apply with a functional product (or even a launched product that people love), you remove a lot of the risks listed above.
• Get working on the YC app ASAP. If you’re unsure, apply! The app takes a few hours and it’ll help focus your thinking if nothing else.
• If possible, make sure that your whole team is ready to dive in whole hog. Starting something up is a commitment to your founders and to your new investors. Having a team member who has other commitments can be a source of contention.
• Hack the system! Every session I get emails from people asking me to review their apps. I usually do. I can’t imagine why you wouldn’t do this… YC founders are people who wrote successful applications and spent at least 3 months getting repeatedly kicked in the junk by Paul Graham and friends. I’m sure we must know something about how YC thinks that might not be obvious. If you can’t bring yourself to ask a stranger for some time, how are you going to raise money after YC? How are you going to hire your first employee?

The Interview

I don’t recall the stats on how many applications make the cut, but if you get asked in for an interview, congratulations! Now get to work building something (hopefully you already have).

• Get started on a demo. If you walk in and start monologuing, you’ll fairly quickly get interrupted and asked to start showing stuff.
• The “demo” will be less like Steve Jobs and more like Guantanamo Bay. You’ll be derailed almost instantly and peppered with questions and objections.
• Have a backup idea that you’re comfortable talking about. I know several founders who were essentially told, “we don’t like that idea. Do you have any others?” This may be a test of how much you love your idea as much as anything else. Founders who refuse to pivot often die from it. It also might be a test of your ability to have good ideas. If they don’t like your idea OR your backup, they might los faith in your ability to grok what people want.
• Practice. Ask 10 smart people to name 10 things that will make your idea fail. Have good responses for those objections. Don’t practice a speech. Don’t practice a 10 minute demo, practice little 1-2 minute chunks of a demo that you can string together if they leave you alone. Practice individual talking points and responses.
• Be willing to be wrong but also be willing to disagree. YC doesn’t want lapdog PG fanboys(and girls!), but they also want people who are coachable and willing to learn. Don’t be afraid to say, “That’s one of the things we’re going to have to figure out, but we have a few ideas.”
• Be dynamic and energetic. You’re a storyteller here. Your job is to get YC excited about your business. Make them believe that it (and YOU) are an investment opportunity. Work on eye contact, not talking to too fast, and thinking on your feet. Have someone role-play an aggressive interviewer.

That’s about all the advice I have. I’d close with this point– very very very few YC founders wouldn’t do it again in a heartbeat. It’s a killer experience and it’s certainly a needle-mover during the most fragile part of your new company’s life. Applying is cheap in terms of time and rewarding even if you don’t get asked in for an interview. Do it!

Last night I spoke at Seattle Tech Startups. Given that lots of people who go to these meetings tend to be wantrepreneurs (aspiring startup folks), I focused on early decisions that need to be be made. Do you shoot for a great lifestyle business or do you aim for a grandslam? Services biz or product biz? Bootstrap it, find angels, or court VCs? And when you answer all that, how do you settle on an idea when you have lots of them bounding around in your head (for this part, I liberally borrowed from Ev Williams’ great post on evaluating startup ideas, which I posted a riff on a while back).

After my short presentation, there were some really fabulous questions. Two of ‘em kept me thinking and I wanted to expand on the answers a bit. Here they are.

Question (paraphrased): “Given that takinghuge piles of VC money both has the dangers you describe and and firmly closes the door on most early acquisition opportunities, why are people still going after big VC?”

My response was two-fold at the time. First, there are some ideas that require a lot of money– as an example, I mentioned a local northwest guy who is working on a really cool electric motorcycle… It’d be hard to imagine getting that business off the ground with $500k of angel money. I also mentioned that some entrepreneurs look at their valuation as a score. Taking $4m on $12m post-money is essentially saying that, on paper, your company is worth $12m. Feels pretty cool, I suppose.

Two more things to add here.

First, I think people chase VC because it’s available. Angels are purposefully elusive– they don’t exactly hang out a shingle saying, “I’ve got $50k burning a hole in my pocket”. VCs, on the other hand, have a web site, and processes to handle/process deal flow. They almost always want to lead the investment by negotiating terms and putting in a big chunk of the money, while angels sometimes shy away from leading/negotiating, but are happy to pile on with other investors.

I think there is a big hole to be filled here by institutional investors who aim at a larger number of smaller deals (something that most VCs can’t handle because they have too much money under management, take too long to do the deals, and have too few people to sit on boards). There are smaller funds out there that are starting to fill the “early/small” niche (with $250k-$1m investments) but they are rare and (from an outsider’s point of view) are buried in interesting startups to invest in. The good news is that they’re seeing great success, so more are popping up every day. If you want to see a good list of folks who are really looking at early-stage/lower-dollar deals, here’s a great article profiling a few. You’ll notice a decided lack of ‘em in the Northwest. Madrona is mentioned but I think they very rarely do a deal less than $1m.

Second, B2B. Despite Web 2.0 hype, there is tremendous money to be made with B2B software. Going the B2B route requires a sales engine or some clever distribution innovation. If you’re spinning up a sales team, that requires LOTS of money flowing out of your business (salary, commissions) before you recognize revenue for their efforts.

Question #2: “Can you talk about how to decide whether a business/idea should fall into the “lifestyle” category or the “get funding a go big” category?

My answer last night centered around overall magnitude of the idea. Could you imagine it being the next Google/Facebook/Salesforce.com? Is it that ambitious? Can you set out milestones where you end up selling for $100 million? I also mentioned that how much you NEED is important. If you can “run the experiment” for $500k to see if your market/team/idea are as good as you think, raising $10m is silly. If you can roll those same dice taking no funding and working on weekends, raising ANY money might be silly.

What I want to add: Think about how you fit into recent investment trends. Investors closely follow trends. Most seem to focus on trends and recent acquisitions that you’re already reading about– the top tier ones often try to anticipate what’s going to be the next trend. Imagine yourself pitching your idea to someone who religiously follows and tries to anticipate trends. Will their eyes light up? To my amateur eye trends that are important out there right now are: Ad networks, widgets, casual gaming, video advertising, iPhone/mobile apps, Facebook/MySpace apps, social aggregation, and (of course) anything that could credibly take a shot at killing Google. Am I missing any? There are a few tired trends that probably still have legs with some investors like niche social networks, social news sites, photosharing, etc.

If you’re outside these trends, that’s okay (we certainly are, though we think that productivity/information overload is a meme that is growing like gangbusters). It just means that you’re going to have a harder time raising money and you’ll need a bit more traction to pique VC interest. We’re just about ready to close our angel round with a fairly platinum-plated group of investors, so it’s certainly do-able. I’m just glad our founders all had hefty personal bank accounts to allow us to grow the business over the 3 months of fundraising. I know plenty of people who’ve needed 6-10 months to raise a round, so be prepared for that if you’re bucking trends.

Remember, Google came to a market that had well-funded mature players at a time when a lot of really smart people were saying that search was a dead business where you couldn’t make any money.

Another thing to consider on this front is this: Do you have some unique aspect of your business that allows you to acquire new users/customers for zero or near-zero cost? SEO, viral marketing, user-generated content are all fabulous ways to get an organic flow of visitors to your product. VCs love clever distribution wrinkles, and most successful startups have a fabulous (if sometimes accidental) story to tell here.

And finally– the best way to decide whether it’s a small biz opportunity or a huge business opportunity is to launch. If you’ve got something big, the market will start dragging you down the growth path. If it’s a big opportunity and you’re growing like gangbusters out in the wild, funding isn’t hard.

Anyhoo– hope folks enjoyed the talk– I’ll post the video if STS puts it up.

I just got word that I’ll be speaking at the Information Overload Research Group 2008 Conference in New York City on July 15th (though I’m not on the page yet… ).

This is the grassroots organization mentioned with RescueTime in the New York Times article “Lost in Email, Tech Firms Face Self-Made Monster” (well, it’s probably fairer to say that this is the article where RescueTime was mentioned with them!).

The conference looks like it’s going to be real interesting (and not just because I’ll be speaking there– I’m positively riveting!). If you’re in the neighborhood (or if you need an excuse to visit NYC), you should sign up (the conference only costs $150 and includes lunch– it’s a helluva deal). Brian Fioca, one of my co-founders will also be in attendance.

If you don’t want to go to the conference but want to grab a beer on the 14th, drop me a line!

A lot of people are damn religious about bootrapping businesses. Especially nowadays when it’s so easy to start a software business– you just need a few hackers, Ruby on Rails, a cheap virtual server and you’re ready to roll, right?

Sure.

But just because it’s cheaper to start a software company, doesn’t mean that it’s that much cheaper to make it from when you launch a product to the point where you’re sitting back, drinking a margarita, and marveling at the recurring revenue machine you’ve created.

The way I look at it, there are three bars that matter to me.

1) Making enough money that the business brings in enough money to pay the overhead. Rent, servers, lawyers, whatever. Hopefully you keep this really lean.
2) Making enough money that the founders get an insultingly low (but still existent) salary.
3) Making enough money that the founders can take home roughly what they’d make if they went and got a real job.

Bootstrappers are woefully bad at guessing how long it’ll take to get over these bars.

Let’s look at everyone’s favorite example of bootstrapping: 37signals (whose products and philosophies I love, by the way). According to a recent post, it took them about 6 months to build Basecamp, with DHH spending 10 hours a week (they don’t mention how much time other folks invested, but let’s assume it’s 2 other people at 10 hours a week). It turns out that with a really popular blog, a very successful consulting firm, and all of the attention that they got with Ruby on Rails, it took them about a year to get to the point where they could give up consulting and work on it full-time. I assume that they were somewhere between the 2nd and 3rd bar (mentioned above) before they made the leap, though they might’ve taken a pay cut as a leap of faith in the growth that Basecamp was experiencing. DHH sez:

“It didn’t turn into a smash hit overnight either. We ran Basecamp for a year alongside our other obligations before it was doing well enough to pay all the bills and afford our full-time attention. Most good businesses didn’t become great ones within the 12-18 months that the poster boys of the startup lottery did.”

Amen!

I’ll give you an example closer to home. RescueTime (my baby) was on TechCrunch 3 times, LifeHacker twice, and add in a few thousand other blogs (of varying flavors and colors). We are a Y Combinator company, which gives us plenty of geek cred. We’ve been [edit for clarity] mentioned in an article on the cover of the New York Times, and have gotten mentions in PC World, US News and World Report, BusinessWeek, and more. More important than that, we’ve got happy users who seem to like telling their friends (the old fashioned kind of viral marketing!). I think most SaaS startups would feel very lucky to get this kind of attention– we certainly do. But for all of this attention, I really don’t expect to clear that second bar for many many months (we’re only a month or two into having an offering that people can pay money for, so give us time!).

Let me be clear about the type of startups I’m talking about– I’m talking about low-cost (or free) product companies with price points low enough that having a human being actually SELL the damn software would be inane. Whether it’s a payout of $.83 for an ad click or $24 bucks a month for BaseCamp– having a human being wandering around selling this stuff doesn’t scale, and chances are your founding team doesn’t consist of anyone who is a motivated (and skilled) software/ad salesperson anyways.

On the other hand, if your price point is high (generally requiring a more complex or premium offering) or if you have a services component (web development consulting, managed hosting, etc)– you’re golden… Or at least you have great potential to ramp up revenue fast (as you can justify a sales effort and fairly easily convert time into money). Of course, there are the obvious downsides– for enterprise software you have to build… enterprise software (capital intensive and damn ugly). And then you should expect to spend 60-70% of your cash on sales and marketing. If you go the services-heavy route, you’re simply selling time for money… You can make a nice business out of this (I ran a consultancy for 7 years which I eventually sold out of) but there’s virtually no equity to be built– no one wants to buy a consulting business.

In my opinion, if you aren’t prepared for 18-24 months before you actually get your first paycheck (either through savings, doing it part-time / half-assed, or seed funding) you’re setting yourself up for disappointment.

Tomorrow I’m speaking on a panel at the 6 Hour Startup Conference. It should be good fun and (hopefully) informative, so if you’re spinning up a new company (or pondering it), you should come on by. Here are two things I won’t be doing at the conference:

• Pitching my own company
• Reading bullet items from a PowerPoint deck

Here’s a great quote from a great blog post about conferences and meetups:

“Here’s what a speaker owes an audience that travels to engage in person: more than they could get by just reading the transcript.”

I’m not a stellar public speaker (and it’s more challenging to reliably deliver value on an unstructured panel like this), so I hope we can deliver.

Long ago, when I set up this blog I read a few primers on blogging. One of them suggested that you have a picture of yourself on your blog. There were lots of good arguments for doing it, so I dutifully hunted among my photos for a picture of myself. Turns out that I didn’t have too many (I tend to be behind the camera rather than in front of it).

I did find one that I liked. It was on a nasty old fishing boat on the Prince William Sound (in Alaska). A friend of mine had bought the boat and invited a few friends for an multi-day cruise. There was no running water. The bathroom was a 5 gallon green bucket (I’ll leave it to your imagination how we “flushed” it). At the end of the trip, I was scruffy as hell, but I’d had an absolute blast tromping around the rugged islands of Alaska. That’s where the pipe picture was taken.

As my blog actually accumulated readers, there came a trickle of negative feedback about the pipe, which has increased to a steady stream. Some people feel like I was trying to look serious. Or academic. Or rich. Or that I was just clowning around. To me, the photo had a ton of meaning. To anyone else, not so much.

For some reason, this made me think of one of my favorite posts on product/UX design. Here’s a quote:

“When I started working on Wufoo, I was definitely a bad designer. I thought I was hot shit and knew all the answers. I saw the user as a wild beast that needed to be tamed. He got in MY way. Use the tool the way I designed it, fool—not the way you think it should work [emphasis added]. Thinking back, I remember being angry all of the time.”

One of the big lessons (which I continue to learn a little bit more every single day) is that it doesn’t matter a damn bit what you’re saying (whether you’re “saying” it to a user with design or saying it with words or pictures on a blog), it matters what’s being heard.

So I’ve pulled the pipe picture in favor of a more recent one. Some people suggested that I keep it as a “schtick”, but I’d rather be known as “that guy who kicks ass with RescueTime” than “that guy with the pipe” (who actually never smokes a pipe).

I wrote a little guest post over at FoundRead (part of the GigaOm network). Give it a read!

http://gigaom.com/2008/04/02/ycombinator/

This Wednesday, I’ll be participating in a really interesting panel discussion entitled “Silicon Valley Fights Back Against the (Information) Monster it Created”. The panel is moderated by Matt Richtel (New York Times Correspondent). Here’s the description:

Intel launched no email Fridays. So did US Cellular. Some managers at Genentech urge employees to check email only twice a day. The Valley and its denizens are trying to combat a problem of their own making: information overload. Everyone knows the issue. The very tools spurring your productivity are also undermining it. This is not merely a question of personal organization. Information overload is spawning industries. New businesses and new products are being created from the likes of Microsoft and Google, and numerous start-ups, too, to help people manage and mute the cacophony and onslaught of information. The question: what can you do to avoid becoming overwhelmed? Even further, can you capitalize or build or enhance your business around helping others to regain productivity? Or have we created a monster here destined to eat us alive (please forgive the hyperbole…we wrote the end quickly because we have incoming email and need to get to it right away).

- Registration: 06:00 PM
- Buffet: 06:00 PM
- Program: 07:00 PM

Location:
Crowne Plaza Cabana Hotel
4290 El Camino Real
Palo Alto, CA

You can register for the event here. I have two guest invites– so holler if you’d like to go.

Someone posted an interesting “Ask YC”, asking:

“How to start becoming an entrepreneur while still being an employee?”

Having done this twice (started a company that eventually turned into a full-time startup), I settled in to reply. Before long, it was clear that my response was long enough to justify a blog post.

I’ve done two part-time-to-full-time startups (one resulted in a startup the sold, the second is RescueTime– currently a YC-funded company– cross your fingers).

At the end of the day, I think Paul Graham is right when he says:

“The number one thing not to do is other things. If you find yourself saying a sentence that ends with “but we’re going to keep working on the startup,” you are in big trouble. Bob’s going to grad school, but we’re going to keep working on the startup. We’re moving back to Minnesota, but we’re going to keep working on the startup. We’re taking on some consulting projects, but we’re going to keep working on the startup. You may as well just translate these to “we’re giving up on the startup, but we’re not willing to admit that to ourselves,” because that’s what it means most of the time. A startup is so hard that working on it can’t be preceded by “but.”"

In the beginning, however, it’s not always practical to dive in full-time. And sometimes when your idea is off-the-wall and also easy to build a prototype for, it’s smart to whip something out just to see if what you’re building is as cool as you think it might be before you take the plunge.

So if you’re too poor or too unsure to do the right thing for your business and dive in full-time, here are a few things that seemed to work for us when we did it part-time:

1. You need a co-founder and some cheerleaders… If you can’t find 2-3 friends who are really excited to be beta testers for what you’re building, ponder changing your direction. The arguments for a co-founder are many and varied. For a part-time effort, they are essential to keep you on-track and working. At some point, you’ll hit a motivation wall… If you have a partner who is depending on you, you find a way past that. If you don’t, you’ll often lose interest and find something else to entertain you.
2. Pick a day or two per week where you ALWAYS work, ideally in the same room as your co-founder(s). ALWAYS, no exceptions. We did 1 weekday evening and 1 weekend day. That doesn’t mean we weren’t working other days, but having a fixed schedule helps you through the phases of the project that might not be so fun.
3. Have a boat-burning target. What will it take for everyone to dive in full-time? 5,000 active users? 10,000 uniques a week? Funding? That should be a shared understanding. You don’t want to have one founder ready to go full-time when another has reservations. This is easy to gloss over, but you should really nail it down. I’ve lost 2 co-founders to this issue (they weren’t ready to dive in full time and I was). It wasn’t fair to them and it wasn’t fair to me.
4. Pick an idea that is tractable. Every business is a theory. If your theory is, “we can build a better web-based chat client”, that’s something you could test quickly. If you’re theory is “we can build a car that runs on lemonade”, that’s just not going to work as a part-time effort. The scarcity of available time should force you to distill the idea to the absolute essence that is necessary to test the theory. No extraneous features!
5. Understand that your v1 ia probably going to suck. Read David of Weebly’s post on persistence. It’s a long road. My first startup was a ridiculous fluke (2 months and then sold). 99% of the overnight successes you read about were slogging in the muck for 5 years before the night in question. Be prepared for a long journey and be surprised if your startup is an immediate hit. So with your v1, look for the tiny little flicker than you might be on to something to motivate you to make it better. Every week, make it better than last week and see if that flicker of light can be fanned into a tiny flame.
6. If you’re going to screw off at work (everyone does), spend it getting smarter about the stuff you don’t know. If you’re a coder, read a few design/usability blogs. Read up on what motivates angel investors. Research competitors and write down what they do well. Get brilliant at SEO (it’s not hard). Write a LOT more (blogging helps). Think about virality and research the heck out of it. This is all more valuable (and hopefully just as fun) as looking at LOLcats on Reddit. All that being said, be aware of the fuzzy line between using your cool-down time at work for your startup and stealing time/resources from your employer. If you’re paid to do a job, you need to do it.
7. [edit: Thanks to Ivan in the comments] Be sure you own your startup. I’ve had the fortune to work in places and companies where there was very clear ownership of “after hours” work. If ownership of your personal IP is not clear, do NOT rely on the good will of your employer. Greed can do funny things to people, even if they were initially big supporters of your startup.

At the end of the day, you want to prove whatever you need to prove as quickly as possible, so you can dive in full-time. Near as I can tell, there are plenty of startups that have started as “hobbies”, but you need to take it out of that phase as soon as you can. There is nothing that drives a team forward like the fear of public failure, debt, and starvation. Leap off the cliff and start building the airplane on the way down and you might be surprised with what you can pull off.

Big release for RescueTime today. I have no time to write about it (and probably oughta write on the RescueTime blog if I did have time… which I promise I’ll do).

If you’re a RescueTime user, check it out and let us know your thoughts!