Sam Altman - How to succeed with a startup

A transcript of Sam Altman’s (OpenAI CEO) talk at YCombinator on “How to succeed with a startup” (29/8/2018), transcribed with OpenAI’s Whisper Large-v2 model.

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Okay, today I’m going to talk about how to succeed with a startup. Obviously, more than can be said here in 20 minutes, but I will do the best I can.

A product so good people tell their friends

The most important thing, the number one lesson we try to teach startups is that the degree to which you’re successful approximates the degree to which you build a product that is so good people spontaneously tell their friends about it. Startups always ask us for the secret to success. They always want to believe it’s something other than this because this is really hard to do, but this is it. If you can build a product that is so good people spontaneously tell their friends about it, you have done 80% of the work that you need to be a really successful startup. If you think about the most successful companies you know, Google, Facebook, whatever, you probably found out about them because a friend of yours said, you got to try this, it’s great. So this is the bar, something that people love so much they tell their friends about it.

Easy to Understand

One important indicator for a product like that is a product that’s simple to explain and easy to understand. If you can’t explain in a few words what you do and if people don’t, if at least some people don’t say, oh, that’s pretty interesting, that’s usually a mistake. It’s usually a sign of unclear thinking or a need that is not big enough.

Exponential Growth in Market

Another thing that startups need to look for is a market that is either started to undergo or is soon going to undergo exponential growth. I think this is actually related to one of the biggest mistakes investors make when evaluating startups. Investors always say, well, what’s your growth rate? We care about the growth rate. Investors will forgive smallish revenue today if it’s growing quickly. For some reason people don’t think about markets this way. But if you think about the most important startups, they are the ones that start in small markets that are growing very, very quickly. 11 years ago the market for iPhone apps was $0, it’s now huge. And I think if you only think about the TAM today, you’ll make a big mistake. What you really want to do is identify a market that’s going to grow every year and be able to ride that up elevator.

Real Trends vs. Fake Trends

A really important thing to figure in this out is learning how to differentiate between real trends and fake trends. A real trend is something that’s actually going to happen and a fake trend is not, or at least not yet. And before you make a big bet on a new platform, you want to make sure it’s real. Now there’s an easy trick for this, which I’ll share now. Real trends are ones where a new technology platform comes along and the early adopters use it obsessively and tell their friends how much they love it. A fake trend is one where people may buy the product but don’t use it, or at least not enough. So an example of a real trend, I already mentioned the iPhone, I’ll mention that again. When the iPhone first came out, many people were dismissive because they only sold a million or two million that year and they said, well, this just doesn’t matter. But for the people that had an iPhone, they used it for hours every day, it became central to their lives. They loved it. They told their friends, you’ve got to get one. And I think it was obvious then to people paying attention that something had fundamentally shifted and we had a new computing platform that was going to spawn huge businesses and it was a good time to bet on mobile apps. A fake trend, or at least a fake trend as of August 2018, I would say is VR. I do believe VR will be big someday, but today most people that I know that own a VR headset use it never or very rarely. And so although a lot of people talk about it and maybe even a lot of people buy them, there’s not the intense usage per user among the early adopters that I think you want to see before you make a big bet.

Evangelical Founder

Another thing that startups need, at least one evangelical founder, usually the CEO. Someone at the startup has got to be the person that is going to recruit, sell the product, talk to the press, raise money. And this requires someone who can infect with enthusiasm the whole world about what the company is trying to do. And someone who becomes the chief evangelist for the company, it’s very hard to succeed wildly without that. It’s very hard to build a team at all without being able to do that. One thing that helps for this is having an ambitious vision. You never want to be grandiose, that turns people off, but you want to let yourself grow more ambitious over time. And as long as you do that organically, people will respond. Ambitious visions are exciting, they’re fun to work on.

Hard Startup vs. Easy Startup

In fact, I think in 2018, at least in Silicon Valley, it’s easier to start a hard startup than it is to start an easy startup. Now this sounds paradoxical, but ambitious projects are interesting. You know, in the current environment, it may be relatively easy to raise capital, but it’s really hard to do everything else. There’s so many startups. It’s so easy to start one. They all sound so promising that bringing together enough talent in one organization is really hard to do. And if you’re working on a problem that may be modestly successful, it’s kind of easy to get the first few people to join. You can give them a lot of equity. But then it gets really hard. Why is employee 20 going to join? Why is this, why does this matter to the world? Why should someone work on your startup versus any of the other things they could do? And picking something that matters, if you’re successful, is a great way to do that. And so I think it’s really important to think about when you’re starting a company, how is this going to evolve into a vision that a lot of people want to help with, that a lot of people want to be associated with? Because I think getting talent and getting mindshare is really hard in the current environment. And people are interested in startups that matter.

Confident and Definite View of the Future

Another thing that we’ve noticed among our best founders, again and again and again, is that they have a confident and definite view of the future. They may be wrong. And so we say it’s good to be confident and flexible. But this idea that you are confident and definite, this is what I think is going to happen, or this is what is going to happen. And being relatively sure of that, having courage of your convictions, being a clear leader saying, we’re going to do this and that’s why, even in the face of a lot of doubt, that seems to really correlate with success. And this comes back to having an ambitious vision.

Huge if it Works

But the entire startup ecosystem is best set up to support companies that have a low chance of success but are huge if they work. And I think going for something that is huge if it works will attract the best people. I’m not going to talk too much about the team. There are a lot of obvious things I could say that have been said many times by many people about, you know, you need smart people who want to work really hard and who communicate well. These are all really true.

Team

But I’d like to mention a few nonobvious things that we’ve noticed that we don’t hear people say as much about the team you need to assemble. Vinod Khosla says that the team you build is the company you build and I really think that’s true. I’ve still met only a handful of founders, I think, that spend enough time on recruiting like Mark Zuckerberg is famously one of them. But building a great team, I think, other than picking the right market and building a great product is the most important thing you do. All founders go through a transition, all successful founders, where you switch from building a product to building a company and building a company really is about the team.

Optimists

So you need optimists. The whole world will be telling you why you’re going to fail as a startup if you don’t have that internal fire of belief, if you don’t have people who say, you know what, we are going to do this and it doesn’t matter what the haters say, we’re going to figure this out and there is, you know, this problem, it must be solvable. If you don’t have the spirit of optimism on the team, it’s very hard to succeed when the world continues to punch you in the face. You need at least some idea generators. There are a handful of people in any company that has gone on to be really successful that I’ve been able to work with, who are just really good at coming up with lots of ideas. You don’t want too many of these people because that’s more ideas than a company can follow through on, but having some people within a company that are just constantly throwing out new ideas, most of which will be bad, turns out to be super important to have on the team.

“We’ll Figure it Out”

The spirit of we’ll figure it out is my favorite thing to hear among early startup team members. A lot of things go wrong. The situations that startups win in tend to be incredibly dynamic. And so this idea that even if I’m not qualified on paper, even if I haven’t solved this problem before, even if this problem feels like it’s going to kill the company, which many problems will feel that way, this spirit among the team of, you know what, we’ve got the people we need. We’re going to figure this out. We’re going to get this done. That’s super important.

“I’ve Got It”

Another thing that I love to hear from early team members is, I’ve got it. So you hear in big companies a lot of people say, that’s not my department, someone else is going to do that, or this is really bad, this is going to hurt us. And you want people who just step up and say, I’ll do it. I’ve got it. I don’t have to worry about it.

Action Bias

You want people to have a bias towards action. Startups especially in their early days often win by moving very quickly. You never get as much data as you’d like. You never have as much time to deliberate as you’d like. And you want people who are willing to act with much less data than they like to have, with much less certainty. And then if they act and it doesn’t work, they adapt really quickly and try something else.

The Blessing of Inexperience

We talk also about the blessing of inexperience. We have seen many of our startups do incredible things because no one told them it was hard. No one told them they can’t do it. There’s a great quote from Steve Wozniak about how all the best things he ever did came from having no experience whatsoever and having no money. And you know, that obviously is not always true, but there is a magic thing that happens with startups, especially in their early days, before they’ve learned they’re not supposed to be able to do certain things. And so I think as a startup, again, it doesn’t work to have everybody being inexperienced, but you can take more bets than you normally would on inexperienced but super high potential people. That’s the end of the topic on team.

Momentum

One of the most important jobs you have as a founder is to never lose momentum. And this is a little bit depressing because it means for the first few years you never get to take your foot off the gas. You never get to really rest. We try to be honest about this, that startups are not the best choice for work-life balance at all, but especially in the early days. Startups survive on their own momentum. If you have momentum, people keep delivering results beyond what they think they’re capable of. If you lose momentum, it’s very difficult to get it back. And so continuing to make sure that the startup has a cadence, that the startup keeps winning on a relatively short and predictable intervals, this is really important. And it’s up to the founders to make sure that you don’t lose a hold of this.

Competitive Advantage

Another thing that we think startups need is a competitive advantage over time. Now this is something that sounds so obvious, I hesitated to even put it in. This is well discussed, but we’re seeing more and more startups apply to YC and we ask them, so what is the long-term monopoly effect here? What is the long-term competitive advantage? What is, you know, where is the network effect in this business? They look at us like it’s the first time they’ve ever heard this question. All of the really great businesses I know have an answer to this question, and in fact the better they are, the more they pretend not to. But this is something that you want to have a plan for.

Sensible Business Model

Another thing you want to have a plan for is at least a sensible business model. You don’t have to have it all figured out at the beginning, but when we ask founders, so how are you ever going to make money? And they look at us like it’s the first time they’ve ever been asked that question, which happens more often than you would think recently. That’s a bad sign too.

Distribution Strategy

Again, this one is so common that I hesitated to put it in here, but when we ask a startup how they’re going to grow, how they’re going to get users, and they look at us like it’s the first time they’ve ever heard that question, bad sign. So some sensible idea to try here first.

Frugality, Focus, Obsession, Love

Paul Buchheit once spent a bunch of time looking, one of the YC partners, spent a bunch of time looking at the traits of our best founders and tried to distill down what they were, and he came up with frugality, focus, obsession, and love. I actually think that is really good, I don’t have much to add, but I think these are things that you should be able to say about what you’re doing and you as a founder.

Why Startups Win

And finally, I want to talk about why startups get to beat big companies. There are lots of reasons. I’m going to talk about a few common ones here. I think these trends are valuable enough that as you evaluate startup ideas you might do, it’s worth thinking about if you fit into these, because it’s really hard for startups to beat big companies most of the time. And here are some areas where we see it happening repeatedly.

One No vs. One Yes

So I think one difference is if you are a product manager at a big company and you want to do something that sounds like a bad idea but is a good idea, you have to get everybody from your boss, sometimes all the way up to the CEO, to say yes. So one no can kill you. If you’re a startup, you can go to YC Demo Day, any number of the thousands of investors can say yes and you get to have a crack at it. So it’s a very different mindset and for those ideas that sound bad but are good, because of this phenomenon, this one no versus one yes, startups can win. In fact, startups usually do beat big companies in that category of ideas. So look for ideas that sound bad but are good and where you are much more likely to get one yes than someone at a big company is to get all yeses.

Fast-Changing Markets

Another area where startups usually beat big companies are in very fast changing markets. Startups great advantage is in agility and speed. The more a market is changing, the higher the number of decisions you get to make and the higher number of tweaks to your product and your strategy you get to make. And you want to optimize the number of those decisions that someone has to make to compete with you because a big company will make them on average worse and certainly much slower than you do. So the speed of market evolution gives you a lot more chances to compound your advantage over a big company.

Platform Shifts

And then finally, startups usually win on big platform shifts. Many people have observed that startups come in these clusters. Those clusters usually come after a big platform shift. We’ll stick with the iPhone example here. After mobile apps became a thing, many new companies got started that are now quite valuable. And one of the reasons here is, you know, most large companies work on sort of an annual cadence at least. And when there’s a huge platform shift, they are not good at making a big enough strategic pivot. The battleship just turns too slowly, whereas a startup can say, wow, woke up this morning, the world is fundamentally different than it was six months ago. We’re going to go all in on this new direction. And so that’s an area where startups usually win. There are many others, but thinking about these three, I think, is directionally a good thing to do.

All right. That’s all I’ve got for today.