Image by Jeswin Thomas

A Student’s Guide to Startups — Experience as a Student Investing in Students

As a #RecessionGraduate and someone interested in startups and startup investments, recently, I’ve been thinking a lot about my career choices and what it all means given all that’s happening.

Leaving school for work during an economic downturn has negative consequences later in life for socioeconomic status, health, and mortality. (Research)

I’ve been working on an investment thesis on student-founded startups at Protégé Ventures. While intended as a guide for picking startup investments, I apply this personally when thinking about starting up. After all, deciding which idea is worth committing the next 5–10 years of your life to build is an investment itself.

Why Students?

Like any VC, we work under a set of constraints to guide our investments, partly for productivity and partly for competitive advantage. For us at Protégé, the constraints are S$25k cheques, domiciled in Singapore, and of course, student founders. [1] [2]

The reason for the rising interest in student startups may seem obvious — Microsoft, Google, Facebook, and Tencent were all founded by people who met in school. The average age when the founders of the world’s 7 most valuable companies (all happen to be Big Tech) first started was 25. [3]

Paul Graham, the founder of Y Combinator(YC), saw his fair share of startups founded by 20-something-year-olds. In his seminal essay, A Student’s Guide to Startups, that inspired this piece, he identified 5 key advantages that young founders have over their older peers, namely:

• Stamina
• Poverty
• Rootlessness
• Colleagues
• Ignorance

In the context of startups, these translate to:

• The ability to work long hours (especially important given that young founders are probably less productive when they just started)
• A low burn rate and consequently more shots at the opportunity and getting product-market fit
• Thinking cheaply — innovation is frequently about bringing the cost down or serving the fringe users
• Being able to move to a conducive environment for startups
• Being at an excellent location (i.e. school) to meet potential co-founders
• Fearless optimism and the ability to reimagine something new (sometimes better)

On the other hand, as you age, your living costs and opportunity cost increase, or you have jobs that are too comfortable to leave, and you’re less likely to find people who can echo you: “That’s a brilliant idea! Let’s do that!”

Of course, being a young founder is not without disadvantages. In fact, a Harvard research found that the average age of a successful startup founder is 45. Fortunately, VCs are presented with a large set of young founders, and the game we are interested in here is not the average but the outliers. Hence, a more relevant question to ask is — which student founders are most likely to succeed?

Which Students?

The two major disadvantages that Paul Graham pointed out and I paraphrase here are:

1. Habits leftover from childhood (and education, I might add)
2. A lack of work experience

The core benefit of aging is that you get more time interfacing with the “real world”. The first effect of this is that you begin to learn the mechanics of different industries, organizations, and people. The second effect, and perhaps a more profound one, is that you gradually rid yourself of all the lies that adults have been telling you.

Lies? Yes. For most of us, the world we’ve experienced so far is probably a little nicer or simpler than it really is. Although the adults (e.g. parents, teachers) usually had good intentions (e.g. for our own protection, for education to work), unfortunately, when you graduate, they don’t give you the list of lies that they have been telling you. Life beats it out of you gradually!

While I don’t have that list either, Paul Graham did talk about some of the lies in explaining what goes wrong with young founders.

From YC’s experience, startups by young founders fail because they look like classroom projects. Compared to real startups, classroom projects lack 1) an iterative definition of a real problem and 2) intensity.

Classroom projects inextricably solve predetermined fake problems. [4] That’s not how startups work. Startups seldom solve the problems they should be solving off the bat and often only discover the right problems through a process of evolution.

That process of evolution will come as unnatural to us. Because for almost all of our education, performance is measured by the distance traveled between the beginning and the end of the semester. Essentially, we’re being rewarded for “good effort” — an artificial concept invented to encourage kids.

There’s no reward for “good effort” in the marketplace. The only distance that matters in startups is between where you are and where users need you to be.

This realisation will change how you work. For classroom projects, we’d want every piece of our work to count towards the final grade, but in startups, often, the only value of what you have done for the past few months is to prove you were mistaken. That may still be extremely valuable — because free of misconceptions that everyone else still shares (usually) gets you closer to where users need you to be.

It’s not just how it’s measured, but who is measuring is different as well.

When our graders are one-dimensional, sample-size-of-one, it’s easy to define their needs and give them what they want. Better yet, figure out what the system is and game it. The original intent of learning may matter less if we know we’re being rewarded by a demonstration of effort/spotting the right test questions/etc.

This trick works to a certain extent on bosses (e.g. sucking up to the right people, giving the false impression of productivity) and investors (e.g. convincing pitch decks) as well.

Gaming the system stops to work in startups. What users want is so binary that they can’t be tricked — the product either works for them or it doesn’t.

Furthermore, startups, whether B2B or B2C, typically serve a range of users, and every single user varies slightly. When the sample size is large and varied, it’s exponentially more difficult to figure out the tricks (btw it’s not growth hacking). If you had figured out what each of them wants, you’ve already arrived at your destination.

The intensity part has to do with money. Yes, money is perhaps nominally the predominant motivator for startups, but there’s more at play here.

We weren’t lied to as much as the adults didn’t really explain what the deal with money is. We know from early on that money = getting a job. But since our life so far has been a measurement of effort, so when it comes to jobs, it’s what you want to “be” when you grow up — as if it’s singly up to you in deciding and making an effort to “be” that thing.

The reality is, when you graduate from school to the workplace or the marketplace, it changes from a measurement of effort to a measurement of value. You don’t decide to become an entrepreneur as much as your customers allow you to. You only get paid for the job when you do what your boss/client wants you to. “Being” is incidental; the immediate problem is not to drown.[5]

And you can’t quit. As a child, someone else is treading water for us. If you really don’t want to do something, you cry and say “I can’t”, then they won’t make you do it (Paul Graham calls this the “flake reflex”). In the grownup world, they can’t make you do anything you don’t want to either. Instead, they can just fire you. When you’re the one treading water, you’ll be motivated to do a lot more than you realize.

The relationship between work and money starts to dawn on you. Getting rich is not just about the lifestyle or power or fame, but more importantly, it’s to have the option to escape from the ordinary. Someone who gets that will work much harder to make the startup succeed — with the proverbial energy of a drowning man.

Of course, you don’t need to spend years of working to learn these, and surely, there must be young founders perceptive enough to have figured these out. To answer the question — which students — I propose these criteria:

1. The ability to get things done, with no excuses
2. An understanding of the value of money
3. Patience

(1) according to Paul Graham, is the essence of getting “working experience” — the elimination of the flake reflex. In startups, it translates to you’ll do whatever that’s required to get to product-market fit and beyond (e.g. doing things that don’t scale). While it implies resolution, I think it also implies humility, responsibility, and curiosity, as highlighted by Bytedance founder Zhang Yiming in his letter to college students.

(2) is controversial since sometimes people start a company not to get rich but to achieve self-actualization, and many of the big companies founded by young founders don’t make any money until very late (arguably when adults come in). I deliberately phrased it that way because there’s quite a bit to unpack here.

The first is measurement. Users only care about if you make something they want. Young founders, especially technical ones, tend to get carried away by solving cool, complex problems. Someone with (2) tends to measure what he’s done the same way the market does and will balance his own intellectual satisfaction with empathy for the users.

The second is intensity. Again, evoke the drowning man analogy — whether it’s for survival, safety, or self-actualization (or subliminated sex drive), understanding your motivation will make you work harder to make your startup succeed.

The third is importance. VCs typically judge how important a problem is by its market size, that is, the number of people who will potentially buy your product times the price you charge. Another way to measure impact if you don’t like the idea of equating it to money is expressed by Elon Musk as:

Importance = Utility delta* x Number of people benefited
*Utility delta = Your product — State of the art

Having (2) will not only help you focus on which problems are more meaningful to solve but also, in solving that problem, find out which segment of the value chain is the most problematic.

Once you have figured out which problems are worth solving and you’re convinced that you’ll do whatever is required to make it happen, it’s important to step back and consider that fact it takes a really long time to build a highly successful startup.

As the truism goes, startup is a marathon, not a sprint. From start to exit, it usually takes 5–10 years. Young founders will especially have a hard time appreciating this fact because time passes by more slowly when we’re young, and our shorter lived experience would make any duration seem like a long time. The amount of stuff that needs to happen is either unfathomable or likely underestimated from our POV. As Zhang Yiming pointed out, the (3) patience to execute out your plan, the patience to find the right partners, the patience to think through hard decisions, are crucial for ambitious young founders.

What business?

Focus on Market Risk

The other major disadvantage that young founders have is the lack of work experience. Work experience in the industry often provides insights into problems that have been validated in the sector. The aforementioned Harvard research found that founders having at ≥ 3 years of prior work experience in the same narrow industry as their startup were 85% more likely to launch a highly successful startup.

This doesn’t mean we should all just get a job for a couple of years to understand industries. The core idea in startups is to take risks. To take risks, we first need to understand and evaluate them. So that even if we fail, it’s not because we took avoidable risks.

A key concept about risks in startups is the market risk vs. execution risk framework discussed by Twitch co-founder Justin Kan. As a serial entrepreneur, Kan compares his early startups that are mostly consumer (e.g. Justin TV, Twitch) to his later B2B startup Atrium (RIP). Retrospectively, he points out that starting out as a young founder fresh out of college, he didn’t know a lot and wasn’t good at many things, so it makes more sense to do a consumer startup where there is a lot of market risk; as he gained experience and skills, it makes more sense to work on a B2B startup that has more execution risk.

Market risk is the risk that maybe nobody wants your product. You are creating a new market that didn’t exist previously and, skills aside, the success of your startup relies heavily on whether people will use your product, product-market fit, and how to make a sustainable and scalable business model out of it.

Execution risk is the risk you might not win your competition or create something 10X better than the status quo. The problem has been discovered and it’s been solved in an inferior way (i.e. the market exists). What you need to do is to recruit talent, fundraise (or not), build a better alternative, and sell the product to customers that have already been identified.

These two types of risks exist in both consumer and B2B startups, and it’s a matter of exposure and which comes first.

Experienced founders have an advantage in dealing with execution risk because they can lower these internal risks by recruiting top talents from a well-developed professional network, raising capital with their demonstrated track record, identifying areas of improvement from their knowledge in the industry and executing better than existing players, and quickly building processes with their management expertise.

As such, young founders should avoid competing with experienced founders on execution-heavily businesses and focus on non-obvious, non-consensus ideas that create new markets on their own (i.e. zero to one). Because in market risk businesses, success relies much on external risks. Experience doesn’t necessarily increase your likelihood or accelerate getting product-market fit in a new market. Having a higher risk tolerance, however, put young founders in a better position in a high market risk environment.

“When you have nothing going for you, except for the willingness to put in the hard work, long hours, blood sweat and tears, you should focus on things that have a lot of market risk. When there is a lot of market risk, you can potentially win this.” — Justin Kan

Demand-driven

It’s easier said than done to come up with non-obvious, non-consensus ideas, and, there is also the danger that the ideas are purely born in the mind of the entrepreneur and they don’t tackle a real problem. This is what Bill Gurley calls “supply-driven” startups.

As opposed to demand-driven startups, which are born out of the problems of consumers and businesses that are left unsolved by current corporations or can be improved by new technology, supply-driven startup are created by a combination of entrepreneurial interest and capital availability.

Youths in Southeast Asia show strong entrepreneurial interest, and venture capital available in the region has grown exponentially in the last 6 years. These are positive supply factors that can contribute to startup formation. However, young founders should be very clear on why they’re starting up. Begin by trying to think of startup ideas doesn’t just yield few good ideas; it also dangerously yield plausible enough ideas to fool you into working on them. The most common mistake startups make by far is to solve problems no one has.

To ensure your idea is demand-driven, here are some tips:

1. Be a target user

If it’s not something you want to use yourself, no matter how much research you do, you’re always one degree removed from reality.

2. Small number of people want a large amount

Something that a large number of people want a large amount of, if it doesn’t already exist, it will be well-competed — it’s obvious. And if people are only mildly interested, they’re probably not gonna pay for it/use it. Almost all of the biggest ideas today started by focusing on a core, small group of audience and then expanded out.

A further caveat: the initial group is small enough that they’re unnoticed/neglected by the current corporations as business opportunities, and it’s not obvious to consensus but obvious to you that they’ll become indicative of future mainstream consumer behaviour.

3. Don’t think of ideas, let ideas come to you

Most of the best ideas are not “thought up” but “noticed”. It’s generally the result of some external stimulus hitting a prepared mind. (Chance III — “Chance favors the prepared mind” ) Thus, the best way to have good startup ideas is not to dream up ideas but to become the sort of person that notices ideas. Paul Graham explains here in detail on how to become that sort of person.

In addition to solving already clearly defined problems, I’d also propose to add another dimension to demand-driven startups — creating new opportunities through rare insights of need.

Ideas that create new markets are hardly conceived by focusing on existing problems. What problems do Facebook, Snapchat, Twitter, Tik Tok solve? I don’t know for sure but I know some segments of the population think they’re awesome. It’s easier to frame them as creating new opportunities than solving problems. If there were problems that they’re solving, it’s on a deeper level of human nature (e.g. communication) that the founders of these companies have a totally different opinion on it (e.g. friending, ephemeral messaging, 140 characters, content discover you), and people like those opinions. [6]

“If I had asked people what they wanted, they would have said faster horses.” — Henry Ford

The difficult thing here is that, how do you know if your opinion is right, and how long before you turn out to be right.

Patience matters. The more important thing, however, and what most young people don’t hear enough is that the glamorous successes widely covered in the press and taught in entrepreneurial classes make it seem easy. The reality is the startup land is filled with the carcasses of dead startups whose ideas didn’t work out. Startups run on fear. You need to be able to be okay with that before you take the plunge.

“You really wanna do the entrepreneurial thing when you have the right idea. There’s no point in deciding ‘I’m going to do it this year with the best idea I got’. You’re probably gonna get crap results. So it’s when some idea that’s shaking you so hard, that you’d go into poverty to see that idea materialized. Because the idea is so important to you that you’d change your life to become an entrepreneur to do the idea.” — Reed Hastings

Now

So what do you do if you’re a student now? While working on making yourself the sort of person that notices good startup ideas, you can also:

1. Learn how startups work. The best way is to work in one.
2. Learn some skills. Technical skills, business skills, and soft skills are all important, but most importantly, it’s to have a knack for understanding users and figuring out what they want.
3. Find potential cofounders. Approach this from finding a marital partner rather than a headhunting kind of way. Start by working on projects with people you respect.

If you’re already building something

If you’re based in Singapore or Southeast Asia, email us at hello@protege.vc, we’d love to hear your idea or at least be able help to connect you with relevant people.

If you’re not, here’s a list of student-run venture funds around the world who will be happy to speak to you.

Note

[1] Our definition is students at any level of study (undergraduate, masters, Ph.D., etc.) and recent graduates within 5 years of graduation.

[2] Protégé Ventures was founded partly out of what we jokingly call the “Eduardo Effect” — it takes some Eduardo to find the next Zuck. We’re hypothesizing that if some of the world’s biggest companies are founded by students, then perhaps the best people to find them are also students who are in the trenches with them and understand their craziness the best.

[3] That’s including Jeff Bezos, who founded Amazon when he was 30, and Jack Ma, who founded Alibaba when he was 35. Removing them, it’s 23. (check the numbers)

[4] As Paul Graham puts it, to have real problems in education, it would be like asking what paradigm might succeed the Standard Model of Physics. If you can do that, you may be well on your way to get the Nobel Prize. In research, maybe there’s some exploration into real problems. But there’s also a degree of separation between research and commercialization.

[5] This goes to explain a difference that we have observed between startups by founders still in school vs. those that just left/dropped out/are on indefinite leave. Graduation removes the built-in escape hatch as a student founder. If your startup fails, you didn’t fail your primary identity as a student, it’s almost like you just finished a summer job. But for founders that just graduated, there’s a real opportunity and emotional cost if they failed their first job. We call it skin in the game.

[6] It doesn’t mean they’re not validated by demand. I think of it as latent demand unlocked by new technology.

Thanks to Lionell Loh, Justin Quek, Kumar Suppiah, Lujie Chen for reading drafts of this and constructive comments.