Consumer, SaaS, or Enterprise?

Early founders often ask whether the classifications of startups (consumer, SaaS, or Enterprise) matter a ton in terms of what kind of startup they should try to start. Is there a such thing as "founder market fit" when it comes to these stages? Unless you're an ex-Oracle sales manager founding a company, probably not. 

It's backwards to rely on the consumer/SaaS/Enterprise distinction early on because that's tactics, only after you've picked a problem to solve. In a nutshell:

  • Consumer — lots of people (tens of millions or more) have the problem, and the problem is medium to severe
  • SaaS — fewer people (hundreds of thousands or more)  have the problem, but the problem is severe
  • Enterprise — a few people (as few as dozens) have the problem, but the problem is extremely severe

Start with what problem to solve, and then choose your tactical approach given what you know about that problem. That'll help you get to where you want to be, and let you optimize for solving a real thing that you actually want to do. 

Finding good startup ideas is hard enough. You don't want to complicate it by setting constraints at the wrong level of a if you can help it.

What to do when you just start making something useful

A founder in China I met asked me what he should do with a business he started that has a few hundred users that are happy. He's not sure what to do next yet.

Here's what I wrote him:

The main thing is to a) figure out how you can make money, and then b) figure out how you can grow. How much you know a and b will determine whether or not you decide to raise money, or do it as a lifestyle business, or don't do it at all. It's important to figure that out as soon as you can, since those are really the only next steps from where you are. If you can grow and make a lot of money (high unit economics / margin) then you should raise money. If you can grow but can make some but not a lot, then you can probably be a good lifestyle business and you should just try to get to profitability. If you can't grow or you can't make money doing what you're doing, then don't do it.

I think the most remarkable thing about this trip to China is while the markets are radically different, the fundamental problems founders face are absolutely the same. 

Babbage's broken dreams: A brilliant design for the world's first mechanical computer, sabotaged by personality

Brilliant inventor Charles Babbage designed the Difference Engine, a pioneering mechanical computer capable of storing and operating upon up to 1,000 numbers with a limit of 50 digits each. Remarkably, it wasn't until the modern era when researchers used 19th-century mechanical fabrication techniques to verify Charles Babbage's designs did work after all. 

A lecture in 2008 at the Computer History Museum by Doron Swade shed light on what went wrong

In fact, no one at that time had warned that these calculating machines could not be built. Many other machines - some of them useless - were in fact built using those same Victorian era mechanical parts and tools. Instead, there were a myriad other factors contributing to the failure to physically realize the Difference Engines. These included: an argument with his lead engineer over worker compensation, run-away costs, muddled financial arrangements, wrangling with a changing British government for funding, and a resulting discontinuity of negotiations over funding and construction.

Perhaps, Babbage's personality had more to do with the failure to complete the Difference Engines then the underlying technology of the time. Known by his first biographer as the "irascible genius" Babbage had lots of pride and hubris. He behaved as though being right entitled him to be rude. His quarrels with the British government and with chief engineer Joseph Clement might have doomed the project.

When Clement resigned in March 1833, the practical construction of Difference Engine No. 1 stopped - 11 years after it was conceived. Negotiations with the British government continued, but funding was finally axed in 1842. Difference Engine No. 2 was conceived and designed between 1846 and 1849 - long after the design of the (never completed) Analytical Engine.

Regrettably, none of these three machines were built in their entirety in Babbage's lifetime. Only years later did we recognize the potential and power of the underlying machine architectures, which were independently "discovered" by later day computer pioneers.

A preventable tragedy. It was lack of interpersonal skills leading to inability to raise funds (and inability to manage execution!) that kept such a vitally important innovation from surfacing. Not the first time, and certainly not the last.

Irascible geniuses everywhere must take heed as they pursue their dreams. Being smart, right, and brilliant is no license to be rude and treat people poorly. So many startups crash and burn, not because the tech didn't work or the founders weren't smart enough, but because the interpersonal neglected. 

Thank you, Y Combinator

Dear friends-

I wanted to let you know I am stepping away from YC. I've been involved at YC since early 2011 and in that time it has been my privilege to work with over 600 startups and over a thousand founders. It would be impossible for me to have predicted the success the team has achieved since then. After nearly five years, I’m ready to take a break and plan for my next adventure.

It's been a great time and I wanted to thank everyone for being awesome. PG, Jessica, Trevor, and RTM have built an enduring organization and I can't wait to see where my friends and partners take it. Led by Sam, the YC partnership has taken the founding vision and put it on track for tremendous success and impact. Between the incubator, YC Research and YC Fellowship, the future is bright indeed. YC is engraved in my heart. To my fellow alums: I will always be there for you.

My wife and I are headed to Southern France and Spain for a few months to relax and enjoy the wonders of parenthood with our 3 month old infant. I don't know what is next yet, but making great software and helping others do the same will always be my life's purpose. See you all back in SF in the new year.

With much love,

Deprogramming corporatism

There’s a culture to big corporations that is unnatural and detrimental to founders who have spent too much time in them. Some experienced founders have a really hard time coping with starting a new company, and are very frustrated and surprised when things don’t work even when they're working really hard at it. And even when founders overcome that, often they’ll try to grow the team by hiring experienced directors and managers from corporations that are well known and successful. Many of them fail pretty quickly, and it’s always a surprise to everyone, especially the experienced hire. 

These are well-known startup tropes for a reason. There are specific aspects to that culture that cause problems. If you know what they are, then you can at least recognize it and try to counter them.

Doing things without results

People become corporate do-nothings because it’s easy to become disconnected from the act of creating when you’re at a big company. Even at the best big companies, employees can just do things that look like work that aren’t, and you wouldn’t be able to tell. Getting customers is easier (sometimes trivial) with a large installed base, sales force, or huge brand name. There are large protected revenue streams that cover up failure on the quarterly financials. 

Founders from corporate backgrounds aren't stupid. They're just used to doing things and having something happen— they have the wind at their backs at a big company, and there are a lots of things that you can do at a big co that would never work on your own. It's bewildering to work really freaking hard at something and have no results at all come back. But it happens all the time. 

There’s no air cover for startups. You don’t have backup troops. It’s just you versus the world. So naturally, if your product or service sucks, then you die. You can’t just look like you’re doing stuff. You actually have to make it, and almost totally on your own. 

Cover your ass culture

If doing things that aren’t effective don’t get you fired, then what does? Usually making mistakes that make your boss look bad. Big organizations are just groups of people, and people sure like to talk shit. The one thing you can’t do is look like a bozo. It’s fine to work really hard to no effect (hey, you worked hard!), but if you become a social liability, you’re donezo.

What’s worse than just covering your ass is actually taking credit for what other people do. This seems correlated with people who climb high in organizations. Obviously this works poorly in a small startup environment because there’s nowhere to hide. Someone's got to do the work.

In some sense this dynamic is unavoidable, since we are all social animals after all. Startups can sometimes develop a cover-your-ass culture too, but that’s the job of the founders and CEO to keep people focused on things that actually matter. It helps that startups are just smaller, so this toxic effect of group dynamic is blunted. 

Buzzword thinking and trend-following

How do you avoid looking like a bozo? Well, for one thing, if everyone in the world out there is saying it, then nobody can fault you for it. So getting the right corporate whitepapers, or latching yourself to the right buzzword du-jour (e.g. big data, Internet of Things, NoSQL, etc.) is necessary to blend into the pack. Oh, that big data initiative failed? Everyone else was doing it, so our ass is covered and we won’t get fired. 

Founders get this confused all the time and then wonder why they fail. We said all the right secret words! Why am I failing? It was never about those words to begin with.

Startups can’t survive blindly following buzzwords or whatever trend is hot because you actually have to know what’s coming in the future and be right. That’s all there is. If you chose the wrong market, or you’re wrong about what people want, then you’re toast. I’m not saying all things with buzzword labels will fail. I’m saying that startups for big data, for instance, actually have to make life better for specific customers such that people are willing to pay for it. It has to make sense. It’s not enough to be attached to that name. 

This was a tough lesson for me to learn personally. At 23, I turned down the shot to be first engineer at Palantir (now rumored to be worth $20 billion!) even though Peter Thiel personally took me out to dinner to recruit me. I thought the buzzwords were signal, and absolutely zero of the mainstream press or tech blogs were abuzz about the latest hot government enterprise software startup in 2004. It turns out you have to work on things that a) you know are right, and b) most people don’t know yet. This is why Peter likes to ask: What super valuable company is nobody building yet?


Experienced founders who have grown up in these environments are not doomed to failure. Quite the contrary, those who succeed have avoided, overcome, or escaped the problems described above. 

The recurring theme seems to be simply results. We spend a lot of time trying to get founders to focus on action and results — build product, talk to customers, that’s it. Think in terms of concrete numbers, whether it is user growth, savings to customer, or revenue. There are lots of places in the world where you can survive without results of your own, but startups are not one of them. 

Just as corporate culture is a culture that is learned, not innate— founder culture is learned as well. I think one of the reason why YC works for founders is that it takes a village. It takes a bunch of people who all believe a thing, and practice it daily. It takes fundamentally changing your surroundings and the people you’re around. It takes avoiding the coworking space [0], and working harder than you ever have in your own space. 

This is also a big reason why they say YC is a concentrated form of Silicon Valley. For decades, Silicon Valley has been the place where people can escape their corporate cultures and create something new. Now you can do it with a lot more like-minded people by your side.