"So our lesson learned is that, if you're a Scottish startup and want to apply for YC, make-up some numbers, and multiply them by 10, then walk into the interview and confidently say that you can make that much."
In my mind I saw potential investors rolling their eyes and saying, "Oh, one of those types."
Places like Google or Apple with billions of dollars in free cash flow can spend money to solve 'problems' for which their are no customers, startups cannot afford that luxury. There is a place where the goal is to come up with a novel solution to a hard problem, its called a 'research lab.' And something I always look for in people is where they sit on the spectrum between research and development [2].
The good news is that you can use this to guide your thinking about what the next steps are when you find yourself all revved up to solve a problem. Ask, "Would anyone pay to have this problem solved for them?" and if the answer is yes, figure out how much. And once you know that you know if there is a business there. And you can defend that number using your research.
If you don't know if anyone would pay for it, and after trying cannot figure out why they would or how much, then you are still doing research.
[2] Startup types need to be much closer to the 'development' side than the 'research' side.
So I think we're passed the research stage, and we are actively developing software at the moment (no more research). Overall, as I mentioned in the post, the experience of going through a YC interview is definitely worth it, specially for guys like us who're doing our first startup. But we got the feeling that YC is after more consumer-oriented startups that can scale to huge numbers.
I don't doubt you're past the research stage, my comment was that your advice to 'make up numbers, multiply by 10, and then bullshit' is really horrible advice, Scottish or not.
My opinion is that if someone can't providing the reasoning behind their numbers from first principles then you're not in a 'business' you are in a research project.
I've heard dozens of pitches from folks who 'hand wave' around numbers and I sigh. They say "You can't know this, we'll just have to try it and see." And its true you cannot know what sort of revenue you will get but you can do the research to isolate what you know and what you don't know, and then you can come up with some tests for what you don't know which might inform the possible answer.
You're blog post advice tickled a bit of scar tissue that a lot of people reading this share.
1) Have some admirable amount of "traction", if you've managed to get 20,000 users for a product, that's pretty cool.
2) Be able to articulate why and how you're going to get traction, where the pool of interested users will come from, and how much money that could be worth in the best case.
YC does a ton with non-consumer startups (like mine), but we still have the same two hurdles to overcome. What you're probably sensing is that the viral features you can build into consumer startups are easy answers to some of their questions, though chicken and egg problems come up in most of those cases.
I wouldn't be so quick to equate their failure to impress YC with not having a viable business. It's 10 minutes and can go either way really, and certainly many YC companies fail to find a viable business model. Note that you are pitching three different partners, and might not get one that deeply understands the pain point (this was feedback from one startup that did get in but felt they failed to convince two of the other partners)
For us the feedback was that they thought it was unclear we could turn into a massive VC backed company. Rejecting us was supposedly the hardest decision they made all day. I guess we'll never know if that's true or not since we have decided to continue bootstrapping and won't be applying again with this company.
Some businesses won't scale or won't scale well, which can be a perfectly fine situation as a 2-5 person startup. If I had a 2-person startup bringing in $500k in profit/year I'd be a happy camper, even if it couldn't scale further than that.
I think a lot of founders see investor acceptance as a certain validation to their business, when really it is a classification of their business. Investability isn't perfectly correlated with viability. Consultancies might be the perfect example of this -- they can generate major major cashflow, but you'd never want to be an investor in one. Doesn't mean consultancies are bad businesses, and YC's rejection doesn't mean yours is bad business either.
I will say that many companies that get funded from YC aren't ones that you described. Many have no users or even a launched product, just a big vision in a target market. There's nothing wrong with that, but I just wanted to point out that there is a difference between an unlaunched company getting seed funding and one that wants to execute on an opportunity and could really utilize capital.
I'm not clear what business the OP thinks that YC is in that they'd be interested in companies that don't have a story about how they could get huge. This doesn't have to be bullshit if your idea is a beachhead for something bigger. Not all startup ideas can have a story-- but I think most can if the founders are ambitious/imaginative enough. Example: If you had a hot social site for a single college in 2004, do you think you could spin a credible story on how it could be big? And, once it was big, how it might make money? Or if you sold books on the web in 1994, could you craft a story about how that get huge?
So like you said, it's something that's not big now, but could be huge in say 5 or 10 years from now.
Even 5 or 10 years from now, there won't be that many more people shopping for cloud services than there are now. Right now people are talking about a startup bubble, how many more startups will be there 10 years from now? I doubt many more. There is a finite number of people that will start companies each year. Starting companies isn't for everyone.
Fortune 500 companies will probably switch more and more to the cloud, but they don't need a service since they have someone hired to analyze options.
Further, cloud companies will probably be resistant to a service like yours because it will negatively impact their margins. They will do things like bundle with services, etc in an attempt to drive their own margins.
Do I think eventually there will be a hipmunk of cloud service providers? Maybe, but you should be able to do better analysis than: making up a number, multipling it by 10.
Start with the number of startups launched every day, then determine how much you will make from each startup with each transaction. You can pretty much assume you won't get the enterprise users anytime soon.
You can also assume small businesses won't become expert enough to shop for cloud services and they would rather shop for a total service provider i.e. developer who knows the cloud. (that developer might service 20 small businesses, but only give you 1 transaction when they first research cloud providers).
I should mention that we've been approached by a number of cloud providers who want to be included in our system. We currently support AWS, Microsoft Azure and Rackspace.
It sounds from your previous comments that you are a traffic acquisition play for these providers. You do the leg work and bring them customers, and for that they give you a cut of the action.
Its not a bad place to be, but it isn't necessarily a 'viable' place to be. For each customer you bring to them, how much do you make initially? Does the customer come back to you or do they start dealing directly with the vendor? Who answers support calls? What happens during an outage, do you get paged or the underlying cloud vendor?
If you don't make a whole lot per customer you have to make it up in volume, and you have to be sure that you are not spending more to get to that customer than the customer pays you. If the customer can cut you out of the loop, you have to know when they are likely to do that and why (volume requirements? custom configurations? etc) and generate a way to predict their exit. That will give you insight into their 'lifetime value.' Finally you need to figure out what is the barrier, if any, to someone else being in your space and going after the same customers (is your offering unique? protectable? etc).
Once you know those things then you know what sort of revenue you can expect for 1 customers, 10 customers, and 10,000 customes, and what it might cost you to acquire 1, 10 or 10,000 and by subtracting the second number from the first number, you can figure out how much money you have to pay staff and for facilities, and if you subtract off that cost and the number you have left is positive, then that number, as a percentage of the number you started with, can tell you if this business of yours makes any sense at all. Greater than 15% you can live off it, greater than 50% and you'll be able to expand into adjacent markets, greater than 80% and you'll grow like Google or Microsoft in its early days.
-How novel is this? (sort of novel) -What is proprietary about it? (inherently nothing) -How high is the barrier to entry for competitors? (low) -Who are your possible competitors? (the cloud services themselves AND other companies like you)
So the end game looks like this: either the big cloud providers make their own tools like yours and make you irrelevant, or one of them acquires you. That doesn't seem too investable to me.
I do think it's a perfect 3-5 person startup that you have a good chance of cashing out of, so don't take my post as criticism. As far as I can tell you need an advisor to help you with the "how do I make money" question more than you need an investment.
Meaning, what is the largest you could see your revenue grow to?
With some paying customers it should be pretty easy to model your future revenue. Once you know the number you can estimate profit, then divide it by .1 to .2 to get an approximate exit market cap.
However, I think the numbers that the Valley works on is on a different scale and that's what we are trying to convey in the blog post (not bulshitting without basis).