Dharmesh Shah


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How To Pick The Right Idea For Your Startup

By Dharmesh Shah on August 29, 2011

The following is a guest post by Kapil Kale, co-founder of GiftRocket, a Y Combinator-backed gift card company. Kapil usually blogs here.

As a current startup founder, one of the most common questions I get is how to come up with a good startup idea. I most often get this question from non-technical or semi-technical founders who would probably regard themselves as outsiders to Silicon Valley.

Picking which idea to work on is the most important decision a founding team can make. Execution is important, but is too amorphous a concept to be called a decision by itself.

Team is important too. But while investors can choose between different founding teams based on their experience and such, the team is a constant once the founders establish it. And the lone founder who is still recruiting a team can't really change him or herself, but does have control over what idea he or she pitches to potential recruits.

I'll do two things in this post. I'll lay out some criteria for what makes a good startup idea. Then, I'll describe some ways that people can successfully come up with ideas that satisfy those critera.describe the image

Four Guidelines for Picking the Right Idea

1) Your idea needs to do at least one of three things:

Make something difficult easy: For example, AirBnB made finding an apartment rental easy. In fact, almost all businesses derived from Craigslist follow this criteria-- they make exchanging things between people very easy. My startup, GiftRocket, makes it easy to buy a gift for someone anywhere in the country. Even social tools like Facebook and LinkedIn make staying in touch with people easy, though that is a bit more abstract. Just to test the ubiquity of this quality, I checked the companies in YC's W11 batch and 83% fell into this category.

Make something expensive cheap: Hard technology companies like Apple make the most advanced technology available to a consumer in an affordable package. Deal sites like Groupon do this far more directly. People care about money, and if you're offering them something for a discount, there's a clear value proposition. I did a quick count, and 14% of YCW11 companies matched this quality.

Make something that entertains: Music, gaming, video, and media companies entertain. Zynga solves problems of loneliness and boredom. 23% of YCW11 companies checked this box.

These are all a more specific way to say that your idea needs to fulfill an existing need, and more generally should be something people want.

2) Pick something with a big market pain.

Market size isn't always a great indicator of potential for success. The better question is how happy are you making your users? If you make a few users exceptionally happy, that might be far better than making a lot of users marginally happy. That means that the market for your product may be small, but if you're creating thousands of dollars of value for those users by solving a major problem for them, they'll seek you out. User acquisition and marketing problems just go away.

3) Commerce ideas are very different from social ideas.

Social software (e.g. foursquare, Instagram, Twitter) follows a different path than ecommerce. These companies have userbases that are valuable because of their engagement, and are ultimately monetizable for their data. Foursquare sells their data to local merchants. The key metrics for companies like these are user growth, virality, and engagement.

Compare this with ideas that have a clear business model from the start. For example, Hipmunk and SeatGeek make money on affiliate for flights / hotels and ticketing sites. The key metrics for these businesses are revenue, and eventually margin.

There are big impacts for how you get users to your product depending on which one of these your idea is. Social software usually has to rely on word of mouth and virality. On the other hand, commerce businesses have more concrete customer lifetime values and can buy customers and traffic using ads.

4) Pick something where you can empathize with your users.

Ideally, you would be building something for yourself. However, a lot of founders are able to build something that they don't regularly need-- it just requires that they are good at getting and acting on user feedback. So for example, if you were building some software you needed at your old job, you still might need to build it with the interests of the procurement officer or IT manager in mind.

How to come up with good startup ideas

1. Keep a log of things that you use that "suck" throughout the day.

Life is full of inconveniences, and the neurotic complainers actually have a huge advantage in this department. Every time I get in the cab line when I get to the airport, I always think "there's got to be a better way." Out pops an idea like Uber, or some sort of ride sharing service that helps me split cabs with people nearby.

2. Look through your business and personal credit card statements.

If you're already spending money somewhere, is there a way to cheapen the amount that you're spending? Or do you feel like you're not getting your money's worth on something you bought? Spend statements are a great way to see where there are big markets waiting for disruption.

3. If you work for a company, think about some of the biggest issues that you face.

I was a former management consultant, and version control for documents and powerpoint files was a massive problem for us. I would stay up late at night writing a deck, and find out the next day someone else was working on that same section. Other times, I'd realize that I was using an older version of a deck, working on slides that had been deleted in later revs. There should be solutions to those problems out there, but what exists isn't still sucks. I'm convinced every company out there still has multitudes of these problems, and if you've ever worked for one you've probably encountered them.

In Conclusion

Given even the most experienced investors miss out on ideas that end up being very successful, the only real way to know whether something will be successful or not is to launch it and see what happens. There's no shortage of ideas. Every YC demo day, including the one that just happened, there are always 4-5 companies where everyone wonders "why didn't I think of that?"

But before dedicating your life to a startup idea-- it's certainly worth having a good brainstorming period of a couple weeks, or even months, where you familiarize yourself with the spaces out there and commit to working on something.
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Have you been through the startup idea selection process?  Have any of your own tips or experiences to share?

Topics: guest strategy
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From Nashville to Boston: How A Startup Accelerator Changed Our Lives

By Dharmesh Shah on August 19, 2011

The following is a guest article by Nick Francis, co-founder of Help Scout, a customer support application.

When looking back at successful companies, you can always point to a series of defining moments that changed their business for the better. If a critical decision wasn't made or a specific shift in the market didn't happen, the company would have never made it.

For myself and my Help Scout co-founders Jared and Denny, the opportunity to join a local startup community and participate in TechStars was a defining moment that changed the course of our business forever. In 90 short days, we found a new home in Boston, made life-long friends, learned about building a successful business and made unbelievable progress on our product.

A Little History

As the title suggests, our team is from Nashville, Tennessee. We spent over five years in the consulting business, creating websites for companies of all sizes. We learned a lot and did well, but found our true passion was in building products of our own.

In Nashville the only option for a startup is to bootstrap a successful business, so that's what we tried to do. The consulting work funded our product ideas on nights and weekends. We failed a few times and succeeded once (our first product, Feed My Inbox), but our team was hungry and getting better at our craft every day.

In late 2010, we started working on what soon became Help Scout. We're passionate about solving online support for small businesses and got great early feedback from customers. However, we couldn't sustain any momentum. Splitting time between client projects and Help Scout meant we couldn't move fast enough to launch and gain traction in a competitive market.ts office

We thought long and hard about our options. Help Scout needed 110% focus from all of us to have a chance at success. I talked to some friends and mentors that were willing to help us fund the business for up to a year, but it was risky to bet the company on being profitable in a year with such little funding.

This was about the time I read Do More Faster by David Cohen and Brad Feld, co-founders of TechStars. I was inspired by the stories in the book, and was convinced the startup accelerator model made perfect sense for us. We could work full-time on our product for the first time ever, learn what it means to build a company from people that have done it before and engage in a local startup community of like-minded people. Most importantly, it gave us three months to launch the product and figure out the next steps.

How We Got In

As it stands in 2011, less than 2% of applicants get into TechStars. Being from Nashville, we had no relationships to boost our chances, so we knew it would take a near miracle to stand out enough to be accepted. I believe we got in because of three important factors:

1. Team. My guess is that the actual product accounts for 20% or less of TechStars' decision. The rest is all about team. Do you have people that fill the critical roles needed? What's your track record together? Is the team ready and willing to do whatever it takes to build a great business? Our team's 5-plus years of history set us apart in this regard. We paid our dues together, which helped us build a very strong relationship.

2. Progress. The TechStars application process goes on for several weeks so they get an idea of how much progress you can make in a short period of time. Every week we had to show measurable progress with the business and keep them in the loop. The days of getting accepted to TechStars with no more than a great idea seem to be history.

3. Persistence. We got rejected for the Winter 2011 NYC class, but kept pressing on, determined that it was the right path for our business. Our team's persistence and desire to be part of the program was clear to the decision makers. I communicated regularly with anyone at TechStars that would listen. I was respectful of their time, but took every opportunity to show progress and sell our team as being a great fit for the program.

After a very long and anxiety-filled process, Katie Rae and the Boston group gave us a shot. By March 2011, we were in Boston working on Help Scout full-time.

As a side note, the application process was great preparation for fundraising. Raising money for your startup comes down to the same three factors. Having those factors going for you and being able to sell the vision is what raising seed money is all about.

The Experience

A moment I will never forget happened on the first day of the program when we sat down with David Cohen. The meeting was a train wreck. He questioned every aspect of our business; the messaging, the vision, the pitch ... and he even laughed at our website. He's got a great gift of being able to tell you when things suck (and be absolutely right), yet do it in a way that's humble and caring. He truly loves to help. We walked away from that meeting overwhelmed, but certain we were in the right place.

The first month of TechStars is all about questioning the product. Really smart people challenged our assumptions on a daily basis. We considered 100 different directions to take the product and talked to customers every day. Although we didn't make any major pivots, we got the certainty and validation needed to build the business with confidence.

In month two, we launched Help Scout and made huge progress. From that point on, we had about 25 people intimately involved in the business. These people were asking critical questions and helping us understand challenges that lie ahead. There's no way we'd be in the same position today without them being involved.

The final month was constant preparation for demo day and growing the business to a point where we could make a great investor pitch. Our team learned a ton and I personally became a much better public speaker because I was forced to present in front of people almost every day.

All in all, TechStars gave our startup a fast-forward button. In three months, thanks to the mentorship, a close peer group of other startups and pressure from every angle, we accomplished what a normal company does in a year. We worked harder than ever and loved (almost) every minute. The program has tremendous personal benefit as well; even if the business doesn't work out, we learned and experienced things that will benefit us forever.

The Community

TechStars wouldn't have been a life-changing experience without the people; specifically, the Boston startup community. They came out of the woodwork to give advice, use the product and help us meet potential customers. Every time I met someone, they would introduce me to another three people.

Sharing the TechStars experience with 11 other startups fostered life-long friendships, as well. We spent 18-hour days together in the same office (at least one person actually lived there) for three months, so a pretty strong bond was inevitable. We collaborated, gave feedback, held each other accountable and promoted each other constantly (still do). Early stage startups need that kind of support to manage all the ups and downs.

Being surrounded by a community of like-minded, smart people on a daily basis makes our company and team exponentially better. Our business clearly has a better chance to succeed in Boston, which is why we've decided to make it our permanent home.

Fundraising

The hardest decision we had to make was taking investor money. We believe that bootstrapping has a ton of value for a new business and for more than half the program I didn't feel right about raising any money. However, the reality was that we didn't have the cash to keep working solely on Help Scout for much longer.

One thing in particular changed my mind about funding: good investors are incredibly helpful to your business. They make intros, give advice on request and keep you accountable. As a first-time CEO, I wanted people on our team to keep me in check, to make sure we didn't miss the next defining moment. If seed funding and the people behind the funding give us a better chance to succeed as a business, that's what we need to do.

The best decision we made was to take money on our own terms. We structured the deal to give ourselves the option of whether to raise another round or not. Each one of the 15-plus angel investors in our round are indifferent to whether there is ever a series A. We have enough money now to be profitable in less than 2 years, at which time we will make a decision on hitting the gas with more funding or continuing to grow organically.

Raising money would not have been possible without TechStars and the platform they provided. We never questioned the 6% equity they receive; it was a bargain. And for the record, we didn't ever feel pushed by anyone in the program to take money. It was our decision. Bootstrapped startups are still a great fit for an accelerator.

Could an Accelerator Change Your Life?

For us, the answer was unequivocally YES. We got everything possible out of the program because this type of network and community didn't exist for us in Nashville. It's a great way to get plugged in, get an education on every aspect of building a company and make a ton of progress on your product.

The program seems well-suited for an early stage company with traction, a lean startup that's open to feedback and doing a 180 if necessary (which all of us should be open to). Team size is important—2-5 people seems ideal. Whether you want to raise money or not, it's a great springboard for a growing business.

TechStars was a game-changer for our company. We plan to deliver on our side of the investment in the coming years. Words can't express the feeling I have waking up every day and focusing 100% on making our product everything we know it can be. We have TechStars to thank for the opportunity.

Anyone out there considering joining an accelerator program like TechStars?  Or, have you been through one of the programs already?  What was your experience?

Topics: guest
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