Starting A Company? The Key Terms You Should Know | Startup School

Summary

In this engaging session, Dalton, a managing partner at Y Combinator, guides us through essential startup terminology, offering insights into foundational concepts crucial for entrepreneurs. The video revisits fundamental terms such as Minimum Viable Product (MVP), Venture Capital, and Product Market Fit, emphasizing their significance and implications in the startup ecosystem. Dalton also sheds light on financial terms like burn rate, seed round, and valuation, providing clarity for budding founders. The focus is on demystifying complex jargon, turning them into actionable insights for those venturing into the startup world.

Highlights

• Dalton simplifies complexities around the term MVP, stressing its 'viable' aspect. 🚀
• The analogy of early whaling ventures to explain Venture Capital was quite visual. 🐋
• Angel investors are more casual, often investing from personal wealth and not as a primary job. 😇
• Profitability doesn't always mean immediate revenue – it's about scalability in profits over time, exemplified by Google. 📈
• Burn rate vigilance is vital for longevity in startups; watch those expenditures! 💸
• The variability in what constitutes a 'seed round' was eye-opening – no one-size-fits-all. 🌱
• Dalton clears up misconceptions around Product Market Fit, emphasizing demand and growth stage strategies. ❤️
• Bootstrapping offers control and sustainability without external pressures – a DIY business growth method. 💪
• TAM is speculative but essential for gauging potential market influence. 🌍
• Valuations are more about perspective than definite value – be cautious with these numbers. 🤔
• Emphasizing ARR highlights the importance of evolving revenue streams to maintain a startup's momentum. 💰

Key Takeaways

• Understanding MVP is crucial – it's not just a minimal product, but a viable one that serves a specific purpose. 🚀
• Venture Capitalists (VCs) invest in risky but potentially big startup ideas, reminiscent of investing in early whales. 🐋
• Angels are investors using personal funds and operate on a smaller, often hobby-based scale. 😇
• Profitability takes on new meanings as startups scale, sometimes starting with no profits and eventually growing huge margins like Google. 📈
• Being mindful of your burn rate is essential; don't just make money, manage how much you're spending. 💸
• Seed rounds can vary greatly – they're the initial fundraising stage for startups. 🌱
• Product Market Fit shifts your priority from finding what people want to scaling what they already love. ❤️
• Bootstrapping means growing your business without outside investment – entirely self-sufficient. 💪
• TAM is a speculative measure of your potential market size – think big, like how Tesla and Uber did. 🌍
• Valuation in startups isn't as exact as the stock market – it's more like an educated guess. 🤔
• ARR is all about consistent, recurring revenue streams – a vital metric for sustaining growth. 💰

Overview

Dalton opens with a gentle introduction to MVP or Minimum Viable Product, ensuring that viewers grasp the essence of 'viable,' as not just any product, but one that's meaningful and serves a customer need. This foundation sets the stage for understanding the real utility of an MVP in startup strategy. Then, he transitions into the landscape of Venture Capital, painting a vivid picture of risk and reward that comes with betting on fledgling companies. His story of early whaling ventures analogizes the current VC world perfectly.

As the discussion flows, Dalton talks about different investor types, like angel investors, who often participate with personal finances, differing from traditional VC setups. He elucidates on the startup's lifeline - profitability and burn rate. Google is highlighted as a classic case of delayed profitability that eventually turned into significant financial returns, underscoring the importance of strategic monetary management.

Key financial concepts such as seed rounds and valuations are dissected with simplicity and clarity. The complexity of product market fit is untangled, guiding entrepreneurs to focus on scaling once demand is evident. Dalton also espouses the virtues of bootstrapping, encouraging founders to consider growing without venturing into external funding, thereby retaining control and nurturing sustainability. His insights into TAM and ARR present a strategic roadmap for evaluating market potential and revenue sustainability.

Starting A Company? The Key Terms You Should Know | Startup School Transcription

• 00:00 - 00:30 [Music] hi there my name is Dalton I'm a managing partner at ycombinator and I'd like to talk to you about some startup terminology today all right so I'm going to go through some terms that are common in uh in startup land and give you some more details and Define it okay let's talk about the term MVP or minimum viable product so let's be specific the keyword here is viable a product that
• 00:30 - 01:00 doesn't work at all and is useless to everyone is not viable and so when you're thinking about what is an MVP or how should I build my MVP it has to be useful enough to serve some kind of purpose for the customer again that's that viable word and so it doesn't just mean uh a simple product that you built uh that doesn't do anything it's got to be useful to someone for it to be viable and so remember this next time you're thinking about what should go in an MVP the next term I'd like to talk about is
• 01:00 - 01:30 the term Venture Capital sometimes the people that work in the Venture Capital industry are referred to as VCS uh the way Venture Capital works is they invest a small amount of uh money uh to buy equity in startup companies with the hope that enough of those companies become very large to return minold the original investment that they made they're also comfortable taking more risk than you would take in a traditional investment it's often the case that the majority of a venture
• 01:30 - 02:00 Capital portfolio does not succeed but the investments in the really big successful companies uh pay for everything so for instance imagine you were an early investor in a company like Google or Apple or Facebook that small investment ended up being worth so much um it was worth taking the risk when those were tiny unprofitable companies and so the way to think about venture capital is it's an industry that's looking for businesses that may be risky but could be very huge if they're successful is I understand the original
• 02:00 - 02:30 uh Venture Capital was in the whaling industry the way it worked is when people uh would go out to to hunt whales a lot of times the ventures would fail um and so the people that needed money to start a ship needed to raise money from investors the way they did a portfolio was they would they would invest in multiple ships in the hope that if one of them was successful in capturing the whale it would pay for all the failed Expeditions I'd like to Define what an angel investor is uh no that's not someone that is angelic it's
• 02:30 - 03:00 a type of venture capital investor that is investing usually their own personal money not out of a VC fund and they tend to be the earliest stage investor in a company they also tend to write smaller checks say $20,000 or $50,000 or something like that and they tend to do it not as a full-time job it'll be a hobby or a side project uh they might be running a company they might be retired there's no qualification to be an angel investor it's usually just someone that has money and so you'll see just a wide
• 03:00 - 03:30 a wide type of people that do this and the thing they have in common is they just writing personal checks into into small startups and they're doing it um not as a full-time job so that's that's the best definition of an angel investor okay another term in startups that I'd like to Define is profitability and look there's some pretty obvious definitions of profitability which is just you make more money every month then you spend and that's a pretty good definition but to add a little bit more to it it's good to think about if a business as it grows
• 03:30 - 04:00 bigger and bigger either has stable profit margins or if the profit margins uh increase or decrease it's common to have a startup that at a very small scale might not be making money but as it gets bigger and bigger the profit margins increase it's good to think about if you're starting a startup or if you're working at a startup how your margins I.E the difference between how much you're making and how much you're spending change as your company grows bigger and bigger and what I'd be
• 04:00 - 04:30 looking for is at scale the profit margins are uh pretty good and there's a clear way you make more and more money to give you an example something like Google Google did not make any revenue for its first few years of existence um but the profit margins on online advertising are very high and so once Google turned on their monetization engine they started to make an enormous amount of money they are very profitable you can look them up they're publicly traded and so that's a great example of a company that initially was not making money was not profitable
• 04:30 - 05:00 but was able to have an incredibly attractive business at scale once they turn on the monetization engine and so that's the kind of profitability engine you should be looking for as a startup founder too next I'd like to talk about burn rate burn rate is how much money at the end of the month has uh been burned by your company or uh how much your bank account has gone down so hypothetically if you had a million dollar in the bank and at the end of the month you had $900,000 in the bank you're burn rate
• 05:00 - 05:30 would be $100,000 as a startup founder it is critical to watch your burn rate you may be making money in some ways you may have a lot of Topline Revenue but if you're burning money every month you might go out of business and so it's great as a startup founder to think hard about where the money is going and to pay careful attention to the bank account balance and make sure that your burn rate does not get out of control not paying attention to this is harmful to your startup's health next I'd like to define a seed round there's not a technical definition of what exactly is
• 05:30 - 06:00 or or isn't a seed round so let me give an example say someone raises $300,000 on a safe you could call that a seed round say that there's some uh crazy company that's uh founded by celebrities and they raise a100 million on a billion dollar valuation sometimes they refer to that as a seed round and so because of this big variability it's sometimes hard to tell exactly what is and isn't a seed round U for the sake of argument here's my suggestion a seed round is usually the first amount of money that a new
• 06:00 - 06:30 startup raises of any consequence and so usually when you begin a company and you raise the first amount of money and you say okay we're done raising money whatever amount of money it is that you raised you would refer to as a seed round in addition to other fundraising terms you may have heard of a series A or a series b or a series C um the difference between one of those rounds in a seed round for one it is often the case but not always that in a series A b or c a lead investor is involved you
• 06:30 - 07:00 also may be giving a board seat to that person it's also the case that it traditionally uh the lead investor gets a significant ownership percentage so for instance traditionally in a series a the lead investor might get something like a 20% ownership in a seed round anything goes it could be that it's entirely composed of 50k checks and there is no lead investor right it's a very it's a very wide uh definition but with a a there's usually one primary
• 07:00 - 07:30 lead investor that leads the series a to use the terminology and the same thing goes with series B and C for uh startups that have been around a while and when you keep raising a new round you tend to give it a new name and again traditionally you just keep incrementing the letters in the alphabet and so you'll sometimes see companies that are like a series e or a series G or a series H I think I've definitely seen that before what are the normal valuations for these I don't know it's a wide range and so you can't just just look at what the round letter is you
• 07:30 - 08:00 also want to look at what the valuation is next I'd like to Define product Market fit or pmf product Market fit is something we talk about a lot at Y combinator and it's one of those terms where people talk about it so much you might think you know what it means um but the actual definition is a little bit tricky and there's not actually a scientific explanation of it a good way to think about product Market fit is when you've built something and people are using it and they like it a lot and your biggest issue is no longer trying to Define what people want or trying to
• 08:00 - 08:30 make something people want it's to um start to be in growth mode and serve as many people as you can okay and so one way to think about product Market fit when you're a Founder is that needing to get more customers is not your biggest problem you probably have other problems like scaling or like performance like sales you have all these other problems versus most startups when they first start do not have product Market fit essentially all of them do not have
• 08:30 - 09:00 product Market fit and what this means is they may build something they may have some assumptions about what customers want but they don't have any customers or they haven't worked with enough customers to really figure out if it's serving their needs properly and so startups and the pre-product market fit stage are just spending all their try time trying to you know test their assumptions trying to build trying to design trying to talk to customers to really zero in on what these customers want and so from our perspective there's just a very different set of priorities
• 09:00 - 09:30 when you're pre-product Market Fit versus post- product Market fit when you're pre-product Market fit all you should be worried about is finding product Market fit when you're post product Market fit your job is to stay in that state to keep product Market fit and to grow and scale to the best of your ability and so it's good for you as a Founder to realize that the tactics and PRI priorities you should have are very different depending on which of these two modes you're in I'd like to define the term bootstrapping bootstrapping is when you start a company
• 09:30 - 10:00 and you do not raise any Venture Capital you just use your own personal funds or the revenue from the business to get off the ground so for instance if you were to start a new company that built an iPhone app and you didn't raise any venture capital and you just launched it on the App Store and starting making lots of Revenue and built a successful company you would call that a bootstrapping situation you would say you are a bootstrapper because you didn't raise any money to do it one of the reasons is a great option is it's entirely within your control you don't need the approval if invest to go bootstrap a company it's also a good
• 10:00 - 10:30 option if you're doing something that is not traditionally a venture business a venture scale business um which is something they could grow really really big really really fast bootstrapping is a much much better option for businesses that you expect to get uh to5 to10 million a year in Revenue something like that and to probably not grow beyond that bootstrapping is a great option a convertible note in the context of startups is a financial instrument whereby an investor gives a startup
• 10:30 - 11:00 money and they sign a piece of paper you should read carefully what this piece of paper says in the case of a convertible note it is a debt like instrument there are usually terms in a convertible note by which you would pay some amount of Interest or you might need to pay the investor back and so it's your job as a Founder to read the fine print very carefully an alternative to a convertible note is something called a safe note a safe also known as a simple agreement for future Equity is a financial instrument that was actually initially created by y combinator
• 11:00 - 11:30 specifically Carolyn Levy and it is an alternative to a convertible note if you're raising as a startup founder and you are not doing a priced round and selling preferred Equity a safe is a great option to quickly close money in a seed round ahead of when you would raise a series a at a future date if you're thinking about whether or not to raise on a convertible note or a safe I would encourage you to read carefully the fine print and understand the pros and cons
• 11:30 - 12:00 of each the advantage of a safe is it's there's just less terms to worry about as well as uh different rights SL fewer rights in a convertible note and so that's often very useful to Startup Founders Equity is ownership in a startup company Equity would refer to what percentage of that would add up to 100% of the company that a founder or employee or investor would own if you work at a startup you may not directly get Equity you may get stock options
• 12:00 - 12:30 which are basically a right to in the future execute on the stock options to receive Equity at that point in the future and so it's important for you uh in the fine print as both a Founder a startup employee or an investor to read the fine print and understand if you are getting stock options or if you're getting Equity directly or if you're investing in a safe or you're investing in a convertible node or some other instrument always read the fine print and understand exactly what you are buying buying and selling Tam or total
• 12:30 - 13:00 addressable Market is a term term that you would hear a lot um in the land of startups what it usually refers to is hypothetically if 100% of the potential customers of your product all purchase your product how much money would you be making no one actually would get to 100% of their Tam it's more of just a thought experiment for how big the market could possibly be so for instance if you were trying to establish the Tam of something like a Tesla or a car manufacturer you
• 13:00 - 13:30 would look at how many total cars people buy across the world and that would be the total addressable market and you would make an estimate of how many of the cars could be sold by Tesla one um interesting point about Tam calculations is they can be wrong they can underestimate how big the market could be again to give you an example when Tesla first started the total addressable market for electric cars was Tiny and so you had to believe they the market for electric cars cars would grow
• 13:30 - 14:00 and be so big it would take over and be effectively the market for all cars for the Tam to to seem sufficiently big in addition for a company like uber when they first started the total addressable market for taxis or for car services was quite small but Uber dramatically increased the size of the market because they created a better user experience and they encouraged people to start taking ride sharing that didn't before and so this led to the initial Tam seeming much much smaller than it ended up being and so think of Tam is sort of
• 14:00 - 14:30 just a a potentially helpful thought experiment versus something that is set in stone great products tend to grow The Tam next I'd like to Define valuation uh valuation is a term that people in startup land talk about a lot um what it usually refers to is what valuation the last investor invested at and so say there was a company that raised $2 million on a $20 million post money uh safe the valuation would be 20
• 14:30 - 15:00 million the thing about valuation is it doesn't actually mean there are always buyers and sellers this doesn't work like the stock market in the stock market the stock price is the valuation and anyone could go and publicly trade the stock at whatever their current market price is with startup companies they are privately held there's not really a liquid market and so it's best to think of valuation is just some measure of how it might be valued by some folks versus a true measure of how
• 15:00 - 15:30 much that startup uh would be worth if it were to sell that day or if it were to go public that day often you might have noticed that startups with high valuations uh don't always succeed and so just think of it as a a helpful term but not necessarily always accurate next I'd like to Define an IPO or initial public offering and an IPO um there is a company that is privately held I.E it is owned by its investors or its founders or its employees and IT issues shares or
• 15:30 - 16:00 it sells shares to the public markets and the public markets are things like NASDAQ or the New York Stock Exchange or other you know public exchanges like that and anyone in the public that has a some kind of stock brokerage account can buy some of those shares the reason IPOs are important to startups is it's often a way for their employees or their Founders or their investors to be able to realize uh money from from the companies they have built and it's also
• 16:00 - 16:30 a great um sign that the company is doing well this isn't always the case but IPO is the Big Goal that a company is financially mature that it is growing well and has built something of enduring value next I'd like to Define ARR or annual recurring Revenue you will hear this term thrown along around all the time in startup land and let's break it down annual means every year here
• 16:30 - 17:00 recurring means the customers are either in some sort of subscription that auto renews or they've signed contracts that renew in some way the third R is revenue which should be obvious that's just revenue and so the way to think about this is say you have a company and you have 10 customers that have each signed uh yearly contracts for $100,000 a piece that renew yearly if you have 10 thou $100,000 contracts that R new yearly that would be a million dollars of a r r
• 17:00 - 17:30 and so the important thing here if you're going to use this term is to understand recurring is important and so make sure if you're reporting if you're telling an investor you have ARR make sure it actually recurs um and it also is best if it recurs on an annual basis if you're quoting ARR traditionally if you're billing people on a monthly basis you would quote mrr or monthly recurring revenue and so say it's a subscription to chat GPT or something like that that renews monthly you would more commonly see that Revenue reported as Mr monthly
• 17:30 - 18:00 recurring Revenue versus ARR which is more traditionally companies that bill once a year all right that was startup terminology with Dalton I went through a number of terms you may have heard before and I'll be sure to Define more in the future thanks so much [Music]