Sachin Rekhi

Y Combinator is famous for its well known motto "Make Something People Want." This very simple statement serves as a guiding principle for a startup, helping to focus it on this core goal early on: to ensure that its product provides compelling value to its target audience. It also de-emphasizes many secondary issues that, while important, are not likely to be an early cause of failure for a startup. I'm a big fan of the motto and use it myself as a quick filter for all the startup ideas I evaluate.

Yet the economic recession that we are in the middle of poses new challenges. While it hit in the financial and real estate sectors first, it is undeniable that it will have a lasting effect on all sectors of our global economy.

For the startup community, the most immediate ramifications have been difficulty in raising funding. Many angel investors have significantly cut back their investing. VC dollars have dropped 33% in Q4 08 alone. And for those who can obtain funding, lower valuations, down rounds, and 3X liquidation preferences are back.

At the same time, consumer confidence is down. Unemployment is at all time highs and only increasing. This has resulted in consumer spending being down across the board. With the drop in spending comes the slashing of advertising budgets.

The days of eyeball companies are also gone. No longer can you hope to build a service, drive significant traffic, and be acquired by one of the tech giants. Google, Microsoft, and Yahoo have all announced layoffs and project closures. Everyone knows that acquisitions in 2009 with be far fewer than those in the previous years.

Despite painting this landscape of doom and gloom, I still believe now is a great time to start a company. It simply requires a tighter lens through which to evaluate startup opportunities. A lens that takes into account the challenges of raising funding and early acquisitions and instead focuses on achieving cash-flow positive, ramen profitability, and self sustainability.

And hence I come to my own corollary to the YC motto: "Make Something People Will Buy".

Let me first address how this relates to the original motto. If you think about what this means, it fully encompasses the original statement. In order to make something people will buy, you first have to make something people want. But now making something people want is a necessary, but insufficient condition. You have to take it to the next level and make something people find compelling enough to buy.

This most definitely makes the issue of business model and monetization a first order problem. Instead of taking the tack that this can be addressed later, it forces you to consider this with the initial problem definition. With this paradigm you'll find yourself, as I do, thinking as much about ARPU and TAM as UX and traction.

Many who first come across this will assume it implies freemium, e-commerce, and subscription business models. And it definitely emphasizes these direct monetization opportunities as well as the now growing virtual currency and virtual goods space. As we won't see much growth in online advertising in 2009, charging your users directly for your service will become a much more popular model. We have already seen Sprout, Jott, and others abandoning their free applications in favor of simply providing their paid products.

Yet I by no means intend for this mantra to rule out indirect methods of monetization. It simply requires that if you do plan on leveraging indirect monetization models, you think through the entire conversion funnel of how your app will eventually result in a purchase event. So instead of simply planning on slapping on text and banner ads on your site from your favorite ad network and monetizing page views, you have to think through exactly how your site aggregates a qualified audience, purchase intent, or vertical interest that can be leveraged for commercial value.

We've seen a lot of innovation in the last 5 years on product, but limited innovation on the monetization front. I hope with the current flight to revenue, quality, and sustainable businesses, we start to see real creativity in the business models and monetization methods that drive web businesses.

I find myself going through the mental exercise to challenge myself to think through how Facebook and Twitter, the stars of 2008, could develop a revolutionary monetization strategy as Google once did with its AdWords and AdSense products. And I'm sure you'll see me writing more on my blog about my thoughts on monetization.

So I challenge you to go forth, try this new lens, and make something people will buy.