Executive Summary:
- The 9 main business models that build billion-dollar companies are: SaaS, Transactional, Marketplaces, Hard-set, Usage-based, Enterprise, Advertising, E-commerce, and Bio.
- SaaS (31%), Transactional (22%), and Marketplaces (14%) make up 67% of the YC top 100 companies, with Marketplaces and Transactional businesses creating the most value.
- Key pricing insights: charge to learn customer value, price based on value not cost, most startups undercharge, pricing can increase over time, and keep pricing simple.
Meeting Notes:
Business Models of Billion Dollar Companies
- There are 9 main business models that build billion-dollar companies:
- 1. Software as a Service (SaaS): Cloud-based subscription software where customers pay monthly or annually to access the software.
- 2. Transactional: Facilitate transactions and take a cut (often fintech companies).
- 3. Marketplaces: Two-sided marketplaces that facilitate transactions between buyers and sellers.
- 4. Hard-set: No details provided.
- 5. Usage-based: No details provided.
- 6. Enterprise: No details provided.
- 7. Advertising: Make money through advertisements.
- 8. E-commerce: No details provided.
- 9. Bio: No details provided.
- A detailed guide covering metrics, examples, and key takeaways for each model will be provided.
Insights from the YC Top 100 Companies
- SaaS (31%), transactional (22%), and marketplaces (14%) make up 67% of the YC top 100 companies.
- Marketplaces create 30% of the value despite being only 14% of the list, as they tend to become dominant winners with strong network effects once they get huge.
- Examples: Airbnb, Instacart, DoorDash, OpenSea, ShareThere
- Transactional businesses create 29% of the value despite being 22% of the list, as they are directly in the flow of funds making it easy to take a cut.
- Examples: Stripe, Coinbase, Brex
- SaaS businesses have consistent recurring revenue which allows predictability and compounding growth.
- Very few advertising businesses (3%) become big winners unless they catch lightning in a bottle with organic virality to become a top hub/platform with network effects.
- Examples: Reddit, Twitch
- Key Takeaways:
- No services, consulting, affiliate, hardware, or platform-dependent businesses in the top 100 due to issues like low margins, scaling challenges, and platform risks.
- Recurring revenue with strong retention is consistently a winner if you keep delivering value.
- Network effects, lock-in, technical innovation, higher margins, and organic virality can build strong defensible moats.
Pricing Insights from Top YC Companies
- 1. You should charge to learn who wants your product, how much they value it, and affordable customer acquisition channels.
- Example: Stripe charged 5% per transaction (higher than 3% competitors) to test value.
- 2. Price based on value, not cost. Charge based on the perceived value to customers, not just your cost of delivery.
- Get customers to articulate the value and problems you solve (make money, reduce costs, move faster, avoid risk).
- Raise prices incrementally until you get pushback but customers still pay.
- 3. Most startups undercharge. Lower prices are not a sustainable advantage as larger competitors can underprice you.
- Higher prices signal higher value and allow higher customer acquisition spend to outcompete others.
- 4. Pricing isn't permanent. You can increase over time as you build more value.
- Exclude existing customers or give advance notice for increases.
- Example: Netflix regularly increases prices on 221M subscribers.
- 5. Keep pricing simple and straightforward, avoid adding unnecessary friction.
- Example of good, clear pricing: GitLab
- Example Story: Segment started free, then $120/year. Raised to $15,000/year after an advisor recommended $120,000/year for their enterprise product. This allowed them to capture more value and get acquired for over $3 billion.