#144 - Startup School Week 3 Recap - Anu Hariharan and Adora Cheung

**Craig Cannon** (0:00)
Hey, how's it going? This is Craig Cannon, and you're listening to Y Combinator's podcast. Today's episode is a recap of the third week of Startup School. I've cut down the third week of lectures to be even shorter and combined them into one podcast. First, we'll have a lecture from Anu Hariharan. Anu is a partner at YC. Her lecture covers nine common startup business models and the metrics investors wanna see for each.
Then we'll have a Q&A with Anu and Adora Cheung. Adora is also a partner at YC.
During their Q&A, they'll answer questions from startup school founders on how investors evaluate startups. All right, here we go.

**Anu Hariharan** (0:39)
Thank you all for having me, and it's so awesome to see so many of you at nine a.m. in the morning to discuss metrics. So let's hope we keep you engaged till the end of the session.
So how do we think about what metrics to track? And our advice is find out which business model you fit in. You know, the most common thing people do is which industry vertical are you in? Are you healthcare? Are you biotech? Or are you enterprise? But that's not really the best way to think of metrics. The best way to think of metrics is how do you plan to charge your users? Which is the business model? And which of these business models do you fit in? So roughly there are nine business models. I mean, I would say 99% of you should fit into one of these categories. If you don't, you're probably building something that's incredibly hard, which is what we call moonshot. So I'll walk you through for the rest of the presentation on each business model and what three or four metrics you need to track. Beyond three to four, honestly at this stage, is an overkill. So these are the things that would matter. So what is an enterprise business model? This is a company that sells software or services to a large enterprise. Pretty simple. Very few startups do that. So I would imagine very few of you are planning to launch something from day one that sells to, say, Facebook or Google or Apple or any of them. But if you are one of those companies, examples are like Docker, Cloudera, FireEye, even in the YC portfolio, there are very few that did that from day one. But if you're one of them that sells to large enterprises, you would characterize yourself in this category.
And the large enterprises tend to work in terms of contracts. So your business model will come into three things, which are the three metrics you track, which is bookings. So if you're working with, say, Facebook, they'd say, hey, you're gonna help us hire X engineers. We'd like to sign a $100,000 contract for next year. So that's why you'd say, what is my booking? What's the total number of unique customers I have? And what's revenue? The difference between booking and revenue is Facebook might sign a contract ahead of time. It would tell you at the start of the year that it's 100,000 for X hires over the year. That doesn't mean you recognize revenue straight away. You recognize revenue only when you've delivered the service. Either you've placed all the hires that you set in your contract, or if it's an annual contract, you just divide it monthly. So the common mistakes we see founders do is confusing bookings and revenue. They would have signed contracts, but they haven't delivered anything. The contract hasn't even kicked in, but they're already reporting it as revenue. That's not true because you haven't delivered service, so therefore it's not revenue. And so you should hold yourself accountable for that. The company is not generating revenue.
The second common mistake, which is probably more relevant at the stage that you're in, is Facebook might have verbally told you, I will consider a 100K contract. For them, 100K is not a big deal. For a lot of you, it's a really big deal. That's neither booking nor revenue because it's a verbal offer. So even if they sign a letter of intent, it means nothing. So you really have to have the contract written down, signed for it to be bookings, and for revenue only when you start delivering it.
The second business model is SaaS, which is probably where most of you fit in, especially if you're in B2B or servicing to other companies, you're all probably thinking of SaaS model. It's a very prominent model these days. You see a number, all these YC startups, Segment, Ironclad, Sandbird, they all started with SaaS model right from day one. SaaS is software as a service in terms of business model. It's really subscription business. You charge something monthly for a software that you provide. So what are the four key metrics you would want to track? Well, if it's subscription, by definition, the revenue is recurring, right? Which means if you hopefully have built something that people really like, they'll continue to use it and they pay you every month. So that's why you track MRR at the highest level. That is monthly recurring revenue. How much are you making monthly and what did the customers commit to it?