Lessons of YCombinator: Things I'd do differently after 2 startups

Editor’s Note: Serial founder Tony Wright recently completed a 3-month stint at the incubator YCombinator, where, in November 2007, he and two partners launched RescueTime, which hawks free software to help individuals and businesses spend their computing time more effectively. After successfully launching their consumer offering (7% week-over-week growth!) Tony and his team are preparing to release a version for businesses. They’re also now looking for seed funding. We asked Tony to share with F|R what he learned from the YCombinator experience.

RescueTime is coming up on the end of our formal YCombinator experience, and I thought it would be interesting to reflect on the things we did right and the things we did wrong. It might help future YC aspirants!

For those who aren’t familiar with YC, it’s basically a new kind of funding animal that takes 6% equity in startups that (usually) have barely more than an idea, and generally don’t have a deep background of successful entrepreneurship. In exchange for this, YC offers $15K-$20k in funding (“raman/rent money” as I call it), weekly dinners with Valley luminaries, and a big ol’ Demo Day at the end where you present to hundreds of very motivated investors. Lots more detail is here, and applications for the Summer 08 Session are due by 10pm EST April 2nd (it’s a short app — fill it out!).

I think that applying to YC has been the best decision of my life. A quick word on value: 6% might seem like a lot to give up, as early stage founders, I believe you need to optimize towards your company’s success – not your personal wealth. If YC can improve a startup’s meager chances for greatness by a few percentage points, it’s well worth it. YC’s founder Paul Graham goes into more detail, but in short: I’d rather own 94% of a watermelon than 100% of a grape.

So let me tell you about my unique watermelon…

Things we Did Right:

1. We applied to YCombinator and dove in with both feet. This is the easiest thing (in terms of effort), but boldness is a rare commodity. I’ve been damn impressed with the other YC founders, but they aren’t that much better than many of the great coders I’ve worked with. They’re just bolder.

2. We were different. In a sea of startups that look the same, we stood out. This can prove to be a bit of a liability (see the “Things we Did Wrong” list), but it’s great for social media engagement. No one wants to talk about “me too” startups that clone someone big.

3. We focused entirely on product/market fit. In the frenzy for viral loops and SEO, we quietly chugged away on building something that people LOVED and WANTED TO TALK ABOUT. With that, we’ve seen 7% week over week growth, without a formal viral loop and with no real SEO. Just plain ol’ word of mouth (which is how Google won, by the way). The good news is that we’ve got some great data to indicate that people really want some of the viral/SEO features we have in the pipeline.

4. We didn’t get distracted. It’s easy to focus on salability, hiring, office space, marketing, SEO, funding, etc. All of that stuff gets incredibly easy when you have great product/market fit.

5. We launched. I think we were the first YC company in our session to launch. Our product now is pretty polished and has a nice long (and accelerating) growth curve… Which nips the, “Does anyone want this?” question in the bud. Launching is an admission that your users are smarter about what they want/need than you are. Or at very least, it’s an admission that you have a lot to learn about your users. Dive in!

Things we Did Wrong:

1. We were different (I know, I know– this was in the “Things We Did Right” list!). We were lucky that we had the traction that we did when we talked to investors– it’s resulted in a lot of interest. Without traction/growth I think we would’ve been dead in the water in terms of investment. Most investors chase investment trends (despite the fact that companies like Google and YouTube were lousy looking markets when the early investors got to ’em). Nowadays, widget companies are hot. Ad networks are hot. Facebook apps are hot. If you’re playing in those markets, you can build on the frenzy. If you aren’t, you have a bit more explaining to do to investors.

2. When talking about RescueTime, we didn’t focus on the BIG play. This doesn’t mean we weren’t thinking about it! Investors care more about how/why you are going to get monstrously big than how you’re going build a solid sustainable business. Because we are a bit of a unique animal, we invested a lot of time making sure that people understood what we were doing and why people liked it. We should’ve invested more time describing how we knew it was a huge and underserved market (it is!). Read Fred Wilson’s “Rule of Thirds” — if you can’t tell a story how you’re going to be in that top third, you need to rewrite your story.

3. We didn’t spend enough time on marketing — or talking about why this product was going to market itself. The most common question neophyte entrepreneurs ask is, “Now that I’ve built it, how do I market it?” If you’re asking that question, I think you need to go back to the drawing board. In low-cost / high-distribution markets that we’re all playing in, you need some combination of SEO-fu, viral loops, and tremendous word of mouth. Alternatively, if you actually have a product that you’re SELLING, you need to have some proof that you can bring in buyers without a sales force… Unless you’re building big/ugly Enterprise software for Fortune 500 companies. If you are…. I don’t envy you.

4. We didn’t talk to investors much before demo day. In a way, this is actually GOOD– investors kill productivity, and not talking to them much allowed us to focus on our product more. That being said, we have noticed some common misunderstandings about our pitch in our piles of investor meetings… We would’ve had a better pitch if we’d tested it a few times before Demo Day (to investors or a similarly critical audience).

Tony Wright is currently the CEO of RescueTime, which he launched in November 2007 via the incubator YCombinator. Earlier, Tony founded a web startup in the recruiting space that was acquired by Jobster in 2006. He also previously build and sold a “15ish-person” web development consultancy. Tony holds a B.S. in Psychology from Washington College. Read more from him at his company blog.