Sam Altman - How to Succeed with a Startup

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. 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. 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 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.

Another thing that startups need to look for is a market that is either starting 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.

Eleven years ago, the market for iPhone apps was zero dollars; it's not huge. 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. A really important thing to figure this out is learning how to differentiate between real trends and fake trends. A real trend is something that's actually going to happen, while a fake trend is not, or at least not yet.

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 is 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 and told their friends, "You've got to get one." I think it was obvious then—do people pay attention that something had fundamentally shifted and we had a new computing platform that was going to spawn huge businesses? 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.

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. Another thing that startups need is 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 the whole world with enthusiasm about what the company is trying to do.

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.

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. In the current environment, it may be relatively easy to raise capital, but it’s really hard to do everything else. There are so many startups; it's so easy to start one and they all sound so promising.

Bringing together enough talent in one organization is really hard to do. If you're working on a problem that, you know, may be modestly successful, it's kind of easy to get the first two people to join. You can give them a lot of equity, but then it gets really hard. Why is employee X going to join? Why does this matter to the world? Why should someone work on your startup versus any of the other things they could do? Picking something that matters, if you're successful, is a great way to do that.

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? But 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.

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, 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 the courage of your convictions, being a clear leader saying, "We're gonna do this," and that's why, even in the face of a lot of doubt, seems to really correlate with success.

This comes back to having an ambitious vision. 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. 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 how you need smart people who want to work really hard and who communicate well.

These are all really true, but I'd like to mention a few non-obvious 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. Building a company really is about the team, so you need to—must—the whole world will be telling you why you're gonna 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 gonna do this, and it doesn't matter what the haters say, we're gonna figure this out," then there is 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.

This 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. 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 gonna 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 gonna figure this out, we're gonna get this done" is super important.

Another thing that I love to hear from early team members is, "I've got it." You know, you hear in big companies a lot of people say, "That's not my department; someone else is gonna do that." Yeah, or "You know who? This is really bad; this is gonna hurt us." And you want people who just step up and say, "I'll do it. I've got it; don't worry about it." 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. You want people who are willing to act with much less data than they'd like to have and with much less certainty. And then if they act and it doesn't work, they adapt really quickly and try something else.

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. 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 experienced. But you can take more bets than you normally would on inexperienced but super high potential people. That's the end of a topic on team. One of the most important jobs you have as a founder is to never lose momentum.

This is a little bit depressing because it means for the first few years you never get to take your foot off of 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. So, continuing to make sure that the startup has a cadence, that the startup keeps winning on a relatively predictable and short—this is really important—and it's up to the founders to make sure that you don't lose hold of this.

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 Y Combinator, and when we ask them, "So what is the long-term monopoly effect here? What is the long-term competitive advantage? 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. 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.

Again, this one is so common that I hesitate to put it in here. But when we ask a startup how they’re gonna grow, how they’re gonna 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, 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.

He came up with frugality, focus, obsession, and love. I actually think that is really good. I don't know how 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.

Finally, I want to talk about why startups get to be big companies. There are lots of reasons, and 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.

Here are some areas where we see it happening repeatedly. 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 I see 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. 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 in a big company is to get all yeses.

Another area where startups usually beat big companies are in very fast-changing markets. Startups have great speed; great advantage is 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.

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.

And then finally, startups usually win on big platform shifts. Many people have observed that startup company 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. One of the reasons here is, you know, most large companies work on sort of an annual cadence, at least. 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, we woke up this morning; the world is fundamentally different than it was six months ago. We're gonna go all in on this new direction," and so that's a way that startups usually win, or 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.

Alright, that's all I've got for today. Jeff, thank you very much for having me and for the class!