Chapter 1: How do startups work?

What is a startup?

The term “startup” typically refers to a small, early stage company?designed to grow fast . When we say fast, we mean 50-100x growth in a year, like what?OpenSea ?or?Whatnot ?saw in 2021. For most people, working in a hypergrowth environment can be exhilarating, dizzying and challenging – all at once.

For the purposes of this guide (and to help you navigate the startup landscape), we’re actually going to broaden the term “startup” to include larger companies as well (even up to 1000 people). Many of these startups are still growing substantially, maybe 10-20x annually, but actually operate more like a larger company – with built out job functions, more experienced managers, more stability/predictability or hours/work, and sometimes even FAANG-like compensation as well.

Ready to apply to open roles? View them at?workatastartup.com .

How do startups build products?

At Y Combinator , we tell our startups to make something that people want. It also helps when the founders are building solutions to their own problems. As an example, the founders of Airbnb started the company as a way to help cover rent for their own apartment in San Francisco.

We encourage our founders to start by building a?minimum viable product (MVP)?– a working version of their idea that they can bring to potential customers and get feedback on. From there, the founders can continue to iterate on the MVP in the hopes of gaining active users and customers. In other cases, multiple MVPs result in failure, and the founders start over with a new idea or product.

A key turning point in a startup’s life is when (or rather, “if”) the company finds?product market fit. This is when users are using the product, customer demand is strong, and people might even be telling others to use it. At this point, there’s clearly traction, and the company shifts into growth mode – scaling the team to build the product and business as quickly as possible.

Want to learn more about building products? Listen to Michael Seibel's talk on Building Products .

How do startups make money?

Most early stage startups do not make money – and that’s particularly true for ones that are pre-product market fit. These companies are not lost causes; they’ve typically raised money and can operate without generating revenue for 2-3 years. (More on fundraising later.)

That said, we encourage our founders to test out the business model early on. A?business model?is how the startup intends to make money, either now or in the future. This might mean selling to business customers (Brex ), selling to consumers (Dropbox ), monetizing a marketplace (Instacart or Doordash ) or even selling ad placements (Twitter or Pinterest).

Validating a business model – even at the earliest stages of the company – is useful not only to ensure the company can survive, but also to help the company raise more money, if needed. Investors are more willing to invest in a company that has a feasible path towards profitability than one without any prospects of generating revenue. And sometimes a startup needs additional investment because it needs to reach significant scale before it can monetize meaningfully. (For example, social platforms like Pinterest, Twitter or Facebook need sufficient critical mass before advertisers are willing to promote on their respective platforms.)

Are startups risky?

Joining a startup – especially one that is pre-revenue – is certainly riskier than working at a large tech company like Facebook or Amazon. But are they all risky? There are a number of ways to answer that.

First off, not all startups hold the same level of risk. Many later stage startups have raised significant amounts of money ($20M or $100M, or even more) and they can offer a strong salary and upside on equity. In fact, later-stage startups are often actively trying to hire top talent from big-tech companies, and therefore need to have compensation commensurate with FAANG.

Additionally, some YC startups find profitability early on. Zapier never raised a funding round after YC and is now a $1B company. ReadMe also generated revenue early on and deferred fundraising for 7 years.

That said, most early stage startups do not generate significant revenue. To fund early product development, these startups raise money (known as “fundraising”) to provide the company with the capital to operate. They might raise $2-5M, which is enough to pay a small team of early employees a healthy salary (with?equity) for 2-3 years. Founders need to manage their money carefully, and at YC we tell our founders to constantly monitor two key health indicators of their business:?burn rate?and?runway.

• Burn rate: The amount of money the company spends each month.
• Runway: The number of months the company has left to live given its funding/bank balance, revenue (if any), and burn rate.

When considering a startup, you should ask about these metrics so you know the health of the business before you join. You should also expect a clear, coherent answer about the variables and conditions that might drastically affect either metric.

Which startup you pick should definitely factor in your own personal risk profile. If you have a high tolerance for risk, then an early stage startup (seed, Series A) might be a good fit. If you tend to be more risk averse, you may want to focus on joining a later stage startup (Series B+).

Next time, we'll dive into the specific stages of startups and how to decide which stages might be right for you.

And when you're ready to apply, browse open roles at 1000+ YC startups on Work at a Startup , where you can filter by company stage and size to find startups that match what you're looking for.