Startup Business Models and Pricing with Aaron Epstein | Startup School

**Aaron Epstein** (0:09)
Hey, everyone, I'm Aaron Epstein. I'm a Group Partner here at Y Combinator. And in this video, we're gonna be talking about business models and pricing. There's three main things that we're gonna cover in this video.
The first is the nine business models of nearly every billion dollar company. It turns out there's just a handful of them that build the biggest winners. Next, we're gonna talk about business model lessons from the YC Top 100 Companies list. And finally, we're gonna cover some startup pricing insights that we've taken from the thousands of companies that have gone through YC. So first, let's talk about business models that build winners. If you're not familiar, a business model is a fancy term for how you make money. And it turns out the business models are important because we see founders that often get frustrated when investors won't fund them and their business won't grow. And oftentimes they're not sure why.
And usually this is because they're not using a proven business model. And there are actually only a handful of business models that are responsible for nearly all billion dollar companies. And rather than trying to reinvent the wheel, you should actually just copy one of these. And here they are.
Nearly every billion dollar company is one of these nine business models. There's SaaS business models, which is software as a service, which is cloud-based subscription software that customers pay either monthly or annually in order to access the software. There's transactional business models that facilitate transactions and take a cut of those transactions. These are often fintech companies. And then there's marketplaces, which facilitate transactions between buyers and sellers. These are often referred to as two-sided marketplaces. And there's also hard-tech businesses. There's usage-based business models. There's enterprise. There's advertising. There's e-commerce, and there's bio. And so in this video, I'm actually not gonna get too deep into the specifics of each of these business models. Instead, we're gonna have a business model guide that I've put together that's gonna be linked in the description down below. This guide is gonna cover the metrics that matter most for each business model, key takeaways for each of them, and other similar companies that you can learn from, depending on which business model you're using for your company. In this video, what I wanna focus on is things that we can learn from the top 100 YC companies. The top 100 YC companies is pulled from ycombinator.com/topcompanies, which is a list of the most valuable companies that Y Combinator has ever funded. And so for the purposes of this video, I've gone through this list, and I've matched each company up with their primary business model to try to see what interesting insights we can get from them. Now, some later stage and larger companies actually have multiple business models. However, for your purposes as an early stage startup, you should just have a single business model that you're focused on. And so here they are. These are the top 100 YC companies organized by business model. And there's some interesting things that we see here. First is that SaaS businesses actually make up 31% of the top 100 YC companies. Transactional businesses make up 22% of the top 100 YC companies. And marketplaces actually make up 14%. So just with these three business models, SaaS, transactional, and marketplaces, it makes up 67% of the top 100 YC companies. On the flip side, with business models like advertising and e-commerce, they barely register on the top 100 YC companies list. If you're familiar with startup outcomes and venture capital returns, you know that there's a power law effect, which means that the biggest winners far, far outperform all other businesses by orders of magnitude. And this is true for the YC top 100 companies list as well. Turns out that 50% of the overall value of the top 100 YC companies actually comes from just the top 10 And so it's interesting to look at what insights we can get from these 10 companies too. And here they are. These are the top 10 YC companies by value. There's Airbnb, there's Stripe, there's Instacart, there's Coinbase, there's DoorDash, there's Reddit. There's a number of companies here that you're probably very familiar with or use on a regular basis. And what's especially interesting is that five of the YC top 10 are actually marketplaces.
There's Airbnb, there's Instacart, there's DoorDash, there's OpenSea, and there's FAIR. The interesting takeaway here is that marketplaces are most likely to build winner-take-all companies.
They tend to become so big and dominant in their industry that it doesn't leave much room or market share for other competitors once marketplaces actually get huge. So marketplaces are 14% of the top 100 companies, but they actually create 30% of the overall value because so many are represented here in the top 10 And while marketplaces are really tough to get off the ground, they have a chicken and egg problem where you can't just build your product and then sell it to customers. You actually need to solve for both sides of the marketplace, the supply and the demand, at the same time in order to get customers. However, once they hit the inflection point and they start to work, they get massive network effects where each new user of the platform increases the value for everybody else. That's what makes them dominant winners.