5 Critical and Company-Altering Learnings from B2B Startups with Y Combinator | Anu Hariharan, Managing Director of YC Continuity @ Y Combinator
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The document outlines 5 critical lessons for B2B startups based on Y Combinator's experience helping founders. The lessons are: (1) Many startups' products do not have high enough retention, even after funding rounds; (2) Many B2B startups underprice their products and services; (3) Companies should focus on serving an ideal customer profile rather than trying to serve all customers; (4) Founders should handle early sales themselves to fully understand the process before hiring salespeople; (5) Companies should plan to withstand economic downturns, as the economy is difficult to predict.
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5 Critical and Company-Altering Learnings from B2B Startups with Y Combinator | Anu Hariharan, Managing Director of YC Continuity @ Y Combinator
- 1. 5 Critical and Company-Altering Learnings from B2B Startups with Y Combinator Anu Hariharan Partner & Managing Director, YC Continuity Y Combinator @ycombinator @anuhariharan 1
- 2. 2 We help founders from idea to IPO.
- 3. 1. IS THE PRODUCT GOOD ENOUGH? Many startups do not have a good enough product (low retention), even after their Seed/Series A
- 4. 2. MANY B2B STARTUPS ARE UNDER PRICING
- 5. 3. COMPANIES CAN RARELY SERVE ALL B2B CUSTOMERS WELL Focus on serving an ideal customer profile
- 6. 4. EARLY SALES SHOULD NOT BE DELEGATED Sales should get extremely repetitive for founders before hiring the first salesperson
- 7. 5. PLAN TO REACH DEFAULT ALIVE No one can predict the economy
- 8. 5 Key Critical & Company-Altering Lessons from B2B Startups 8 1. Is the product good enough? Many startups do not have a good enough product (low retention), even after their Seed/Series A. 1. Many B2B startups are under pricing. 1. Companies can rarely serve all B2B customers well. Focus on serving an ideal customer profile. 2. Early sales should not be delegated. Sales should get extremely repetitive for founders before hiring the first salesperson. 3. Plan to reach default alive. No one can predict the economy.
- 9. THANK YOU
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Editor's Notes
- YC has now funded over 2,000 companies. 4k alumni; our companies combined are worth X. Our companies combined are worth Y, Y worth >$1b Our top 100 companies have created over Z jobs Most people know the YC accelerator, but YC has a number of programs now, including Startup School, Work at a Startup, a Series A program, and Growth program to grow post-PMF. YC also has a growth stage fund called YC Continuity YC also has a growth stage fund called YC Continuity - Anu to give her typical intro
- Behind every startup success, there have been many lessons learned in the journey. This is why I’m here today to share with you five key critical & company-altering learnings from B2B startups. Founders often conclude prematurely that they have achieved product-market fit. After raising a Seed or Series A from top investors, companies often significantly ramp up burn and hiring, thinking they’re on a “rocket ship”. This shortens their runway, reducing the time they have to experiment and find deep product-market fit. This mistake is particularly common in hot market cycles because investors often encourage founders to move faster and start “scaling.” When Covid first hit, some of our B2B companies with very low churn - who thought they’d had product-market fit - suddenly hit double digit churn. In some ways, the recession’s silver lining is that you’ll find out whether you have product-market fit sooner, and you can fix it. For example, Vanta bootstrapped almost all the way until the growth stage. They operated towards cash flow breakeven, not profitably but breakeven, so that they made sure they were truly building something that people wanted. When you have a lot of money, you’re not as forced to confront this reality. They used their customers’ willingness to pay - and pay upfront - was a proxy for building something people wanted.
- Most YC startups are under pricing. They are so nervous that no one will like their product that the charge very little or nothing. Being a free product might be the right play for your business, but make sure you are making this decision strategically, not based on fear. Charging money for your product is a great way to learn whether you customers actually have the problem you are trying to solve and how important that problem is to them. Looking back, Gusto said one of their biggest learnings is to charge more to what they feel is the value they’re providing - fix downwards vs. upwards. Many founders are not confident when first going to market and start by charging extremely low. They get initial traction, and begin wondering if it was due to the low price or real PMF. If you’re truly adding value, customers won’t blink if you up the price by 30%. Otherwise, here’s the issue it creates: a business model issue. If you undersell your core business, the business model may not work in terms of the cost of acquisition. You have to build a sustainable business model that can scale across years and customers. Counterintuitively, Stripe changed 50% more than all their competitors when they started just to make sure the value prop of their business was strong. The best founders want to test the core hypothesis of their company early and pricing can be a very useful tool.
- Focus on serving an ideal customer profile. Examples: Brex Convictional
- Sales should get so repetitive
- To assess your PMF, it is important to measure key metrics based on the kind of B2B business you are running (e.g., one that relies on outbound sales to large customers vs. one that is a marketing-driven model aimed at SMBs). You should think about metrics in two distinct components: Growth: whether you have built a product that others need. Value: whether you can also support and maintain new customers over time Growth will come first: You will feel the market pulling you, with lots of people wanting to buy your product. But the second part is a critical component of the equation and is often overlooked. Startups that stimulate customer adoption without creating sustained value to retain customers do not have product-market fit. Hold off declaring you have product-market fit until you have both components. Keep iterating on your product and keep your team small. The key product-market fit metrics for B2B startups are: Part 1: Growth Growth in organic leads: For high-velocity or self-serve businesses, are lots of customers coming to you organically to try or buy your product? Sales cycle time and self-serve conversion rates: For outbound-driven businesses, can you quickly and consistently convert a high percentage of outbound calls to sales opportunities? For free or self-serve products, do signups convert to paid customers at a high percentage? Part 2: Value Time to value: Can you get customers who have bought your product to experience value quickly? Net dollar retention: Do your customers retain and expand over time? You don’t need the answer to be “yes” to all four of these metrics, but ideally you are meeting the benchmarks on most of them before you start to scale. And if you are way off on one or more—in particular sales conversion and net dollar retention—this is an indication that you need to hit pause and understand what isn’t working.