Jared Friedman - Advice for Hard-tech and Biotech Founders

I am Jarrod. I am one of the partners at YC, and I'm gonna talk about starting hard tech and biotech companies set of curiosity in the colonies here today. Who is starting something like a hard tech or a biotech company? Okay, a handful of folks, nice. Excellent, excellent!

Across all of Startup School, there are actually over a thousand companies that are doing hard tech or biotech things, which I think is really cool. So this talk is gonna be most relevant for them, but also for other folks who might think about doing a company like this in the future, even if you're not right now.

Here is what I'm going to talk about: I'll define what a hard tech company is. I'm going to talk about the two most common hard tech problems companies face and how to solve them. Then, we're gonna talk a bit about fundraising, specifically for hard tech companies, building on what Caroline just talked about.

So, what is a hard tech company? This is my definition because I couldn't find a good one on the Internet. The way I see it is a hard tech company fulfills two criteria: one, it will take a lot of time and money to build your first product; and two, even if you had lots of time and money, it's not clear if it would be possible to build it at all. Companies like this are a little bit different from other kinds of companies, and interestingly, it doesn't have to be a physical product. This doesn't say anything specifically about science and technology; it actually applies to a pretty broad range of companies.

Another way of thinking about this is the difference between market risk and technical risk. If your company is building a normal website or a mobile app, you probably have mostly market risk, which is to say you have a new idea; it's not totally clear if people are going to want this thing that you're making. But you probably don't have much technical risk because building websites and apps is a solved problem at this point. Whereas with a hard tech company, you're probably doing something that clearly people would want if you could do it. The question is whether you actually can do it.

Starting hard tech companies sounds hard. I mean, hard is even in the name, and I think this scares off a lot of founders who would otherwise start one. I think this is a non-obvious misconception, so I'm going to try to address it. Here's a quote by Sam Altman that sounds like a complete paradox. Sam said, "In many ways, it's easier to start a hard company than an easy company." That sounds like it doesn't make any sense. But to explain what Sam meant by this, I'm going to tell you a story about a company called Boom. Who's heard of Boom? A few folks, okay.

So, Boom is a YC company from three years ago, and they're doing something completely awesome. They're building a supersonic passenger jet to replace the Concorde. It will fly at Mach 2.2, taking you from San Francisco to Tokyo in five hours. No joke, they're really doing this! The founder of Boom is a guy named Blake. Boom is not Blake's first company. Before he started Boom, he started a very ordinary company that made a mobile shopping app. Blake came, and he talked at YC dinner, and he reflected on the differences between his first company, the mobile shopping app, and his second company, Boom. He said something really insightful.

When he was building his mobile shopping app, getting the product live was easy; you can build a mobile shopping app in a few weeks. But then, everything after that is really hard. It's hard to get press to write about your mobile shopping app because it's not an interesting story. It's hard to get really talented employees to want to work on it. It's hard to get investors to want to meet with you to hear about your mobile shopping app. Sure, it's just hard to get people to care about it.

So, while launching the product is easy, turning the product into a really big company is actually really hard. Whereas with Boom, it's exactly the opposite. Building a supersonic jet is incredibly hard, but everything else around it is really easy. From the very beginning, back when Boom was an idea, Blake was able to get some of the most talented people in the world to want to help him.

We are living at a unique time in the world where it has become easier than ever before to start a hard tech company. There is an incredible amount of investor demand to fund really crazy ambitious ideas like Boom. So, while you will have to raise a lot more money to do a company like this, it's also possible to raise a lot more money to do a company like this. An interesting thing is that the market doesn't seem to fully internalize this yet because most YC applications are not for companies like this. I think one reason that founders don't start companies that are super ambitious like this is because it's really intimidating. I mean, as you guys know, starting any kind of company is really intimidating, but it seems like it's gonna be easier if you start a company that's building something simple like a mobile shopping app.

The counterintuitive thing that Sam realized that I think is true is that it's only easier to get started; it isn't necessarily easier to turn into a really successful company. Not everyone knows how big a part of YC hard tech and biotech are, so I just wanted to give you a few quick stats. At YC, we funded over 250 bio companies and a couple hundred hard tech companies as well. YC is actually the largest bios seed investor in the world and the largest hard tech seed investor in the world. This includes accelerators, seed funds, and every kind of investor.

Here's something that most people don't know. Hard tech companies that apply to YC actually have about a 10x higher acceptance rate than other kinds of applications. I don't completely know why that is. I suspect it's something to do with certain kinds of founders being attracted to really ambitious ideas. A really common question that I get from hard tech companies is, "I am starting a biotech company. How much of YC's advice applies to me? A lot of it seems geared towards other kinds of companies." The answer is, actually, most of it still applies.

I went through the Startup School curriculum; this is the Startup School 2019 curriculum, and I highlighted all the lectures that are typically relevant for hard tech companies in green and the ones that are typically not relevant, at least at the early stages, in red. As you can see, there is a lot more green than red. This is my experience working with YC companies that are doing hard tech and biotech stuff, which is that while there are some differences, there are a lot more similarities than differences.

Okay, let's talk about the two biggest problems specific to hard tech companies. If you guys remember Michael Seibel talking about MVPs, he talked about how some companies have a heavy MVP. That is, it's gonna take them a really long time and typically lots of money to build a first product. This is the case for most hard tech and biotech companies.

So if you're in the position where you need millions of dollars to build your first product, and you don't have millions of dollars right now, what do you do? The simple answer to this question is, you have to figure out some way to make some progress on your idea that doesn't require millions of dollars. That is easier said than done. To help give you guys some inspiration for how you might do that, I'm going to walk you through seven examples of YC companies that were doing hard tech and biotech things that did exactly that.

The first one is Boom. Boom's hack was they started off by doing a bunch of things that don't really cost any money at all. Here are some of the things that they did: they assembled a team of top advisors in the space to give them credibility. They built computer simulations that showed that they have a design that could work. They built a plastic model a couple of feet long that they could take around to people to show them what their vision of this plane would look like. Then they took that model and went around to a bunch of airlines. They showed them the plastic plane model, and they used that to get interest from airlines, to show that there would be customer demand if they were to build the plane. They used basically all of these things in order to raise the money that they needed to actually build the plane.

There's a YC company called Solute, which does something really awesome. They use synthetic biology to produce hydrogen peroxide. On the left is a photo of their current hydrogen peroxide plant, which is enormous and produces truckloads of hydrogen peroxide that they ship all around the country. Obviously, this plant costs a lot of money to build, but on the right side is their MVP. This is what they had when they applied to YC: it is a beaker that can produce about one cup of hydrogen peroxide. What this beaker proved was the concept of their new industrial process for creating hydrogen peroxide, which is like the core idea of the company. They just started with the beaker, and then they progressively scaled up to larger and larger installations until they have the giant hydrogen peroxide plant.

AirX is a YC company that originally planned to make their own medical device. Making a medical device is really hard. Their original plan was going to take several years and millions of dollars in order to get FDA approval for this new device. Then they realized that they could launch a basic version of the same core service they hoped to launch by using an existing medical device that was already approved and writing some software around it. Now, it's not as good as their long-term vision, but it was a good hack to build something simple that worked. It worked well enough, and because of this plan, they were able to get live during YC in less than three months with no FDA approval.

Notable Labs is a YC company that is developing new drugs for cancer. Developing new drugs for cancer is super expensive; it takes a super long time. So the way they got started was by providing services to screen tumors for pharma companies. The services that they ran enabled them to generate revenue and data that they're now using to develop their own drugs.

Astronomy builds telecommunication satellites and launches them into space. That is obviously not a cheap thing to do. It turns out actually that the cheapest telecommunication satellite that is useful costs at least $10 million to build and launch. So Estranja was to start with a test satellite. The satellite in this photo was their first satellite. They built it in less than three months during YC and for less than $50,000. Now, this satellite doesn't do anything really useful; you can't sell it. But by launching an actual fully functional satellite into space and showing that they could do that, they were able to generate the credibility that they needed to go and raise the money to launch a full-scale useful telecommunication satellite.

The last example is Ginkgo Bioworks, a YC company that does genetic engineering of organisms. In order to engineer their first organisms, they needed millions of dollars. Their hack was they went around to some large companies and closed contracts to create those organisms before they had actually made them. The contracts basically said if Ginkgo makes these organisms, we will pay you lots of money. They used those contracts and took them around to investors as proof of customer demand, and they used that to raise the millions of dollars from investors that they needed to actually make the organisms they had promised to customers. So basically, they sold it before they made it. This is a very generalizable technique that a lot of hard tech companies use in one form or another.

Okay, so that brings me to the second most common hard tech problem, which is: how do you prove people will want your product if you haven't built it yet? This is important for founders to prove to themselves because the last thing you want to do is spend years working on some product only to find that people don't actually want it at the end. But it's also important to prove it to investors. Here are a couple of ways that you can do that. The best way is through pre-sales. Ideally, you just sell your product before you build it. This is what people do on Kickstarter.

A good example of this is a company called Jetpack Aviation from two batches ago, which is building the flying motorcycle in the picture. What Jetpack Aviation did was they ran a pre-sale campaign, and they basically sold flying motorcycles to a bunch of people on the internet to prove that people would want them. Unfortunately, doing pre-sales is not always possible. For example, if you’re doing something medical that requires FDA approval, it's actually illegal to do pre-sales, so don't do that. Because of that, we created something called a Letter of Intent or LOI. A Letter of Intent is a non-binding contract to buy your product when it's ready.

Now, a non-binding contract seems like kind of a silly idea—like a non-binding contract is kind of like a paradox. But it turns out that it's actually a very clever construct. Because it's not binding, it doesn't actually commit the customer to buy it. But because it looks like a contract, customers take it really seriously. It's easy when you're talking to a customer for them to be polite and casually say, "Sure, I buy your thing if it ever worked someday," because it's like no commitment for them. But if you ask them to sign an LOI, you'll find out if they're actually really serious about buying your product. Investors know that.

So here's just some quick advice about LOIs. If you decide to go down this route, the more specific the LOI is, the more valuable it is. A good LOI includes all the following information. The cool thing is if you can get a customer to sign an LOI like this, it literally gives you a roadmap for what you need to build in order to generate revenue from your product.

Okay, the last thing I want to talk about is fundraising for hard tech and biotech companies. Most hard tech companies will not be able to bootstrap. They will typically have to raise money from investors. So part of building a hard tech company is coming up with a smart fundraising plan. Sometimes hard tech companies will come to me at the beginning of the batch with a fundraising plan that looks something like this. This fundraising plan is like, "Hey, I have a really good idea. I need $50 million to go and build it, so I'm just gonna go pitch to a bunch of investors until somebody gives me $50 million, and then I'll be all set." I don't recommend this plan.

When I see a plan like this, it makes me think of this: I just like standing in front of a wall, staring up at the wall. The wall is like the $50 million impossible fundraise because the fact is it's just like impossible to get investors to give you $50 million for an idea. You have to make some progress first. So what you want to do is have a fundraising plan that looks like this. This still gets you to $50 million, but it splits it into five discrete races that start very small. The key thing here is that for each of these fund races, you want to have specific milestones that you hit.

So you start off, wanting to be able to make some progress with your company before you raised any money at all, like Boom did. Then you want to use that in order to raise maybe a couple hundred thousand dollars. You want to use the couple hundred thousand dollars to make more progress, which enables you to raise like a million dollars. Then you want to use the million dollars to make more progress so you can raise four million dollars, and so on. While the general principle is simple and easy to understand, a lot of this skill in building a hard tech company is in fine-tuning this fundraising plan so that all the steps are as small as they possibly can be.

The most important part of this fundraising plan is that each step should be too large. By the time you go out and start trying to raise a $15 million Series A, you have to actually have accomplished enough that investors will give you that largest fundraising round. Otherwise, you're just gonna hit another one of those fundraising walls. Really good hard tech founders are maniacal about pushing down the size of each of those steps so that each step is as small as possible, which makes it as easy as possible for them to achieve the milestones that they need to raise the next round of funding.

And that is all that I have about hard tech and biotech companies. [Applause]

Okay, we'll do some questions whenever there. Sure. So the question was of the examples I didn't mention any AI companies, and that's a great point. I probably should have included one. There's a really famous YC company that's an AI company called Cruise. Has anyone heard of Cruise? Cruise built self-driving cars, and they got acquired by GM for over a billion dollars. Yeah, Cruise is a great example of a hard tech company. The original Cruise car was built in less than three months during YC. Kyle basically just was in a garage building this car and writing code for like three months solid, and by the end of YC, he had an MVP that he could use to drive on the highway to show that he could build a self-driving car.

So the question is, "Have I ever worked with any nonprofit hard tech companies?" No. Do you have one? Yes? Okay. We should maybe talk about that after. I'd be interested to hear how that could work. Any other questions over here?

People want this and you're also trying to get like companies to trust you to—like, I understand some of the contracts on the funding and that some of them might be like, "If you deliver, they give you X," or whatever. But it seems like a lot of companies would want to plan specifically around, "Okay, if I see these organisms or whatever, do I have a plan that's definitely gonna get me the organisms or am I like, 'Maybe if I have them, that's great'?" A weird situation, so how do you get around that?

Yes, I'll try to paraphrase the question. It was like, it seems like getting an LOI would be hard because the company doesn't know if you're actually going to be able to deliver it, and they have to plan around that. The answer is yes, it is hard to get LOIs. Even though LOIs are not binding, they're actually pretty hard to get. The weird thing is that the very fact that they're hard makes them valuable. If they were easy, they wouldn't be worth anything.

The reason that they're kind of valuable is that it is hard to get a company to do that. They'll typically only do it if you're solving a really critical pain point for them. If it's just a nice-to-have, it's gonna be hard to get an LOI, which is actually a really good signal for you to know that you're working on something that's a really big problem for them.

Yeah, in fact, about in the middle, yes? Okay, so the question was, "Is there a difference between hard tech and moonshot ideas?" As far as that terminology question, the answer’s no. I was using the terms interchangeably.

So the question is, "If your idea is disruptive, how do you prove that you're gonna be able to make it, or how do you prove that people will want it if you make it?" Okay, both. Well, that's kind of like the examples are kind of about some ideas for how to do that. The key thing for hard tech companies is to figure out ways to prove as much as possible as early as possible in order to reduce the perceived risk that the idea is going to work. The more you can reduce the risk, the easier it is going to be to raise money in order to get to the next steps.

So, you reach the decision leader because it might not be you're in these innovation meetings. Which person is actually going to be, and we're okay. So the question is, for a hard tech company where you're selling to an enterprise and there's one person who's the decision-maker about buying it, but there's another person who has to actually be the user, how do you manage that situation?

Right. Okay. So this is actually like a really cool thing about the LOI. The LOI basically forces you to do a dry run of the sales process that you will eventually do when you have the product before you have the product. Sometimes sales are complicated because you have a bunch of different stakeholders in an organization who may have different incentives. By trying to get an LOI out of the organization, you'll basically uncover that path and figure out what you need to do in order to appease all the different stakeholders to get the sale.

So how can actually be really valuable feedback to get early on in your company? Last one over here. So the question is, how do you find founders and early employees for hard tech companies? The good news actually is I found that hard tech companies tend to have an easier time recruiting than other kinds of companies, kind of like how I was talking about Boom. Talented people are drawn to crazy ambitious ideas, so I actually think it's like a real recruiting advantage to be working on something that's really crazy and ambitious like that.

But in terms of where to find people, I mean, kind of like everywhere. Just like, you know, hiring employees, it's gonna be hard. Even if you're doing a hard tech company, it's gonna be hard to find super talented people.

Yeah, cool. That's all we have time for. Thank you, everyone! [Applause]