Making Startups Powerful

One of the most useful heuristics I have when doing office hours with startups is to ask: what would make this company more powerful? Asking how the company could make more money is a good heuristic too, but it tends to yield incremental improvements. Whereas thinking about how to make it more powerful will sometimes make it orders of magnitude more valuable.There are a lot of different variants of this question, depending on the type of company. Is there a way to transform the company from a mere component supplier into the one that owns the relationship with the customer? Or the related question: is there a way to make the money flow through it? It's always good when money flows through you. [1]Is there a way to create something akin to an app store, where other companies can build upon your product? Then all their efforts to create valuable things make you more valuable too. Ideally this is combined with owning the customer relationship and making the money flow through you. [2]Network effects make companies more powerful, and I almost always think about how to introduce them. I treat it as a kind of challenge to see if there's a way to get network effects even in things you wouldn't expect to have them. [3] It's surprising how often it can be done. And when it can, this sometimes transforms the idea completely; what had been a service is now a marketplace. The deluxe version is full app store, but if there's no more direct way to do it, you can often induce network effects by letting your users share something. For example, if you opt in, we'll tell you how you're doing compared to other users. The obvious AI variant is to let your users opt in to training your model on their interactions with it. Many will resist that, but if some don't, the model they get to use will outperform the vanilla one used by the others.Often you can induce network effects by generalizing the idea, which makes the startup doubly more powerful. For example, if I were talking to a startup building a way for agents to pay for things, the first question I'd ask is whether the agents could also pay one another. If they can do that, you become a marketplace. And being a marketplace is so valuable that if it wasn't immediately obvious what agents could pay one another for, it would be worth spending a lot of time trying to think of something. If you could, it might be worth tilting the whole company toward that, and if necessary even becoming a market maker to get it rolling.These hypothetical transformations of the original idea don't always yield anything promising. Far from it. But they're always worth considering; if nothing else, trying to transform an idea helps you understand it better.There are certain kinds of thinking where ideas start to seem almost physical. Most programmers have probably experienced it. Manipulating startup ideas feels this way too. One transformation that feels especially physical is the strategy of going full stack: instead of selling your technology to companies doing x, you use the technology yourself to do x in competition with them. You can almost see the idea stretch as it engulfs what had been the customer. And now that you own the outside surface, the shape of that probably changes too.There's a variant of going full stack where you eat your way gradually through the customer by doing all their hardest work for them. In the limit case, you're doing all the brainwork and they're just running errands for you. At which point, as in the full stack case, the real customer is their customer; the initial customer is now just a kind of hand puppet.Another thing I'm always looking for is tails that could wag the dog. The history of startups is full of these. Paypal started out doing security for hand-held devices. They created Paypal as a demo of their security software. But then eBay sellers started using it to take payments, and after a couple months the founders acknowledged that this was the business they were now in, even though they hadn't meant to be. So whenever founders build something peripheral to the main product I always ask: could this be the real product?It's exciting when you notice users "misusing" your product to do something you hadn't intended. This means there's something they want so desperately that they'll not only use any solution you offer, but even use things that aren't meant to be solutions. When you see something like that, don't be annoyed that your users are using your product wrong; listen for the message they're sending, because it could be valuable.The reason Paypal grew so fast was that it helped users make money. Few things make you more powerful than that. When you help users make money, they're (a) quick to adopt your product and (b) will pay a lot for it. So your revenues grow doubly fast. Most of the most successful companies we've funded help their users to make money, as does YC itself.Playing the long game makes you more powerful, because most other people you encounter won't be. Most startups competing with you will be run by opportunists hoping to be acquired. Most big companies you deal with will be run by executives who don't expect to be there for more than a few years and are only thinking about this quarter's numbers. So tradeoffs that only pay off in 10 years will usually be underpriced. The classic one is to offer great terms in order to acquire users. I generally advise startups to sell as cheaply as they need to at first; get all the users, then worry about your margins. But there are usually also deeper, structural ways to play the long game. [4]Being generous makes you more powerful. As Tim O'Reilly said, you should create more value than you capture. Many hard-headed business types would write this off as idealistic hippy stuff, but in fact this is the route to becoming really rich. Squeezing every last penny out of customers is a distraction. It gets you 2x returns at most. Whereas discovering some new thing you could make for them could easily get you 10x or 100x returns. They're two different ways of looking at the world, and the O'Reilly way makes more, for those who can do it. [5]The classic example of generosity leading to power is when companies open source their software. They literally give away the product, but by giving it away they both make it a standard and make users trust it more. That makes it spread, and in the end they end up with a small piece of a much, much bigger pie.If you don't want to go full open source, you can get some of the benefits by making your product extensible. One end of that continuum is the app store, but if you don't restrict or charge for extensions you may ultimately end up with a bigger ecosystem. [6]The ultimate in extensibility is to let your product be called via an API. Many companies shrink from that because they dislike the loss of control that comes with it. They want their software to be used only in the way they intended. There may be some specialized domains where you want to be rigid about this, but I suspect it's usually a mistake. Especially now that agents are replacing human users. Who knows what they'll want to do? So err on the side of having APIs. Especially when you're a larval startup and have nothing to lose.Strangely enough, selling to earlier stage companies makes you more powerful. Founders are often surprised by this, because the earlier you sell to startups, the less money they have. But if you get them as customers at the very beginning and you charge based on usage, your revenues will grow at startup rates.This is why Stripe makes a point of signing up companies at the first possible moment. With payments infrastructure, if it ain't broke, you don't fix it, and since Stripe ain't broke, companies that install it never churn. And selling to early stage startups is so straightforward. The founders are sophisticated and decide quickly. If you have the best product, you win. Whereas if you're making something you can't sell to companies till they have 500 people, you're in a much weaker position. Now you're doing enterprise sales, which takes forever and is notoriously not a domain where the best product wins.When I ask a startup how big a customer has to be before they'll buy their product, I always hope the number will be low. And if it's not, I always ask if there's some way to tweak the product so they can sell it earlier. The ideal is something they can Collison-install right now for their batchmates. [7]More generally, having customers who decide fast makes you powerful. Not just because of the speed, but because customers who decide fast tend to decide based on how good you are. Startups usually make the best stuff (if you were both small and mediocre, how could you even survive?) and when customers decide fast, making the best stuff leads straight to making the most money. Whereas selling to customers like hospitals and school districts is like walking through mud. Whenever I meet a startup selling to customers like that, I ask if there's some way they could at least start by selling to a subset of the market that decides faster. [8]There's a strategy similar to getting the customers early, which is to get the data early. Rippling used this technique brilliantly. Their goal was always to be both the operating system for applications dealing with employee data and most of the applications running on it. They didn't know exactly what this would look like; it would have to evolve; so they started by writing onboarding software, because that's where the life of employee data begins. And since there was more at stake for them than just the onboarding software market, their onboarding software was way better than it needed to be, and spread rapidly.Upstream is almost always good, whether it's with money or user relationship or customer stage or data.Since startups make the best stuff, they're strongest on level playing fields. They're weakest in markets dominated by companies you'd describe as mafia. Record labels are mafia. PBMs are mafia. In these worlds you don't win by having the best product. Indeed you may only even exist for as long as the mafia chooses to allow you to. Which is not to say they can't be defeated. They probably can be, but you'd have to do it by coming in from the side — by somehow making them irrelevant, rather than by frontal attack. Then you wouldn't depend on beating them to succeed; it would be an ancillary benefit of winning in another dimension. [9]Often what you're doing when you explore ways to make a company more powerful is finding ways not to be held back by other companies. If you're a component supplier and have to live in a (sometimes literal) box created by another company, you can escape that if you can find a way to own the customer relationship. If you're selling to companies that are big and bureaucratic, you can escape that by selling to them when they're smaller and decide faster, or by using your technology yourselves to compete with them. This pattern is so common that you can use it as a heuristic for generating ways to make an idea bigger. In what ways is the current idea being held back by other companies?Often as not, though, startups are being held back by themselves. A surprising percentage of the advice I give to startups has the word "just" in it. You don't need to x. Just y. One way startups' ideas get twisted into knots is by evolving from something else; there's now a part they don't need, and they don't realize it yet. But with very early stage startups especially, the reason the idea is complicated is often fear. The company is unconsciously cowering by doing something less ambitious than they could. Just y is often, in effect, just stand up straight. And when they do they're much taller.But all these strategies for making startups more powerful have one thing in common — or more precisely, have to obey one constraint. They all have to make things better for the customer. You can't add network effects or make the money flow through you or go full stack just because you'd like to. You can only do these things when the result is better for the customer. Otherwise you won't have any uptake.These are strategies for making startups powerful in the long term, but startups that execute them don't usually have any power at the point when they do. And indeed this initial weakness of startups is why, on the whole, they're good for the world. Newly founded startups are too weak to force anything on anyone. The only way they can become powerful is to make customers' lives better. In fact this constraint is so rigid that you can run it backwards to generate ideas. What would the perfect world look like, from the customer's point of view? If there's a component of that world that the startup could transform itself into, it probably should. Notes[1] You can also make tokens flow through you, and this usually means that money flows through you too, since the tokens have to be paid for. In theory this puts you in a powerful position. You own the customer relationship, and the model companies are in effect component suppliers. The question is how easy it would be for them to engulf you, or even your customers.[2] If you can't create an app store, can you at least define the standard for how different companies' products interact? In a new field there's often no standard yet. But don't worry that you're too small to propose one. If you're one of the first in the field, you presumably have as good ideas as anyone about what such a standard should look like. And everyone is so hungry for standards that the first to be proposed tends to win, no matter who proposed it.[3] YC itself is an instance of network effects in something you wouldn't expect to have them. We didn't intend it to be, but we realized very quickly that that was what we'd stumbled upon.[4] There are even times when it's worthwhile to sell at a loss. But be careful when you do this, because if you give away too much, you lose the signal that customers send by paying you. If your product is a $10 bill that you sell for $5, your growth rate isn't telling you anything useful.[5] The O'Reilly way of looking at the world is more common among founders. When companies switch from making new products to squeezing more profit out of existing ones, it's often because control has passed from the founders to hired managers.Partly this is because only founders tend to have the inclination or the ability to create new things. But it's also because founders have experienced weakness. Hired CEOs take the power of the companies they run for granted, whereas founders remember the days when the company was so weak that it had to delight users to survive.[6] Perhaps flexibility in this department will be the key to finally displacing Apple. One thing you can be sure of is that they'll be restrictive about hardware and software that integrates with theirs.[7] If you switch from asking "What size customers should we target?" to "At what point in their life should we acquire customers?" it becomes clear that targeting bigger companies is just targeting a given company later. As long as you're confident that customers won't churn, why not lock them in early? Why do slow, brittle enterprise sales when you could just sell to early stage startups and then grow with them? This kind of situation is exactly why YC emphasizes growth rate rather than absolute numbers. If your growth rate is good enough, the absolute numbers will take care of themselves. And the way to get the fastest growth rate is to sell to the customers who grow the fastest and decide the fastest.This way of looking at the world comes naturally when you're playing the long game. If you think in quarters, it seems like potential customers have fixed sizes. If you think in decades, you can see they have trajectories.[8] In a normal industry, customers who are slow to adopt new technology represent an opportunity for startups. The slower they are, the more likely you can win by going full stack. What makes selling to hospitals and school districts so grim is that you generally can't — though there are some opportunities to go around schools and go directly to serving students.[9] Apparently one thing record labels and PBMs have in common is that they're full of lawyers. So this is presumably a way to recognize such companies. Thanks to Sam Altman, Patrick Collison, Aaron Epstein, Ankit Gupta, Diana Hu, Pete Koomen, Jessica Livingston, and Harj Taggar for reading drafts of this, and to Diana for reminding me about token flow.