These are notes from a video by Aaron Epstein from YC Startup School. Data mentioned in this video is pulled from ycombinator.com/topcompanies

PART 1: Business Model

“Business model” is just a fancy term for how your startup makes money. Nearly every billion-dollar companies are in 1 of the following 9 business models. Rather than reinventing the wheel, you should copy one of these.

1. SaaS: Cloud-based subscription software

Takeaways: 31% of the top 100 YC Startups are SaaS because recurring revenue makes them great businesses.

2. Transactional: facilitate transactions & take a cut

Takeaways: transactional businesses outperform because they’re in the flow of funds. 22% of the top 100 YC Startups are transactional, creating 29% of the overall value. Examples: stripe, Coinbase, Brex.

3. Marketplace: Facilitate transactions with buyers & sellers

Takeaways: 14% of the top 100 are marketplaces, but they create 30% of the overall value. It has a chicken-egg problem for both sides of the market, but it also has network effects once it hits the inflection point. Examples: Airbnb, OpenSea.

4. Advertising: Sell ads to monetize free users

Takeaway: Don’t sell ads unless you are a top 10 site. Otherwise, it’s too hard to monetize and build a huge scale. Only 3% of the top 100 YC startups are in the model. They need organic virality to win, but when it happens, they get strong network effects.

5. Usage-based: Pay-as-you-go based on consumption.

6. Bio: Science-based tech companies

7. Hard-tech: Lots of technical risk & long time horizons

8. Enterprise: Sell large contracts to huge companies

9. E-commerce: Sell products online

Note what’s not on the top 100 list

1. Services/consulting businesses: non-recurring revenue, scale with people, low margins.

2. Affiliate businesses: too far away from the transaction

3. Hardware businesses: heavy capital overhead, low margins

4. Businesses built on other platforms: too much platform risk

Takeaways

1. Recurring revenue consistently creates winners: highly predictable, higher LTVs, lower CACs, but you need to manage churn by constantly delivering values. 95% monthly retention = 54% annual retention. 90% monthly retention = 28% annual retention. This 5% difference can decide the life and death of a startup.

2. The biggest winners are built with moats: network effects, lock-in/high switching costs, technical innovation, higher margins/better unit economics(Doordash, instancart), and organic distribution.

3. The best businesses are: generating recurring revenue, high retention, defensible moats, close to transactions, scale with software, and prove familiar business model to customers.

PART II: Pricing

Pricing is a tool to help you learn faster:

1. Who wants your product?

2. How much do they want it?

3. How much do they value your product provides?

4. Which channels can you afford to acquire customers?

Pricing Advice:

1. You should charge early on. Most startups are undercharging. You should give a lower price only if it’s in exchange for the first customer feedback valuable logo, and you get lock-in and renew at a higher price.

2. Don’t worry about capturing the full value. Get the order of magnitude right.

3. Idea price is when customers complain, but they still pay.

4. Pricing implies value

5. Pricing on value, not cost

Four categories of values to increase prices:

1. Make more money

2. Reduce costs

3. Move faster

4. Avoid risk

Story of Netflix

If Netflix can increase the price on 221M customers, you should be able to.

Story of segment:

They sheepishly asked customers to pay $10. Their customer replied, “I hope you can charge me more than that. Otherwise, I’m worried about keeping my customer data with you”. Then they hired a sale advisor who told them, “You shouldn’t charge $120/year, you should charge $120k/year. This is an enterprise product.” When they were going into their first sales meeting with their sales advisor, the advisor told them “if you don’t tell them this customer that your price is $120k/year, then I quit as your sales advisor”. They continued increasing prices and were acquired by Twilio for $3 billion.