The Art of Ideation, Part 1: Be a BUM

While exploring the idea for my NewCo, I taught a well-received online course at Oxford, OnDeck and via theHustle. The course is about one of the gnarliest challenges of business: generating and evaluating business ideas. I like to call it “The Art of Ideation.” Since I first taught the course, I’ve clarified it some, and now I’m turning it into a 5-part article series.

In this series, I’ll outline an approach to startup “ideation” that I believe hasn’t been available on the Internet to date. I hope I’ve made it both strategic and high-level but also practical and actionable. Enjoy :)

Overview

Ideation is not a straight-line path. In reality, “ideas can come from anywhere.” You never know when that light bulb moment will happen. I’ve divided the process into 5 concrete sections, but the lines between these sections are blurry and the path through them is nonlinear. One day, you may be in the Definition phase, and realize you have to go back to the Exploration phase because you got stuck. This happened to us at Udemy: we started thinking that live video lectures were going to be the “next big thing,” and in 2009, our customers weren’t having it. We went back into the Exploration phase, talked to lots of instructors, and realized that video-based courses were the future. That started a $3B company.

Sometimes the problem doesn’t appear until the Traction phase. You may be building a company, with a full team and a thesis, and realize that you jumped to the Traction phase too early. You pivot completely and have to start from scratch again. This is how Twitter, Instagram, and countless other startups were born.

The framework:

Step 1: Exploration

This is post 1 of 5, covering the topic of exploration. This is the hardest phase, because by nature it is vague and meandering. You actually are supposed to be unproductive for long periods of time and feel like you are going nowhere. So I wrote the post itself that way: it’s the least tactical of all, to mimic the reality of this phase.

The question we ask here is: how do you even figure out what you want? What market should you enter? Where does inspiration come from? I have two frameworks for this: Be a BUM x Ikigai.

Be a B.U.M.

The Bum framework is part story and part framework. 

The story is this: if you are like most entrepreneurs, you are used to the hustle and bustle. You set KPIs or goals and achieve them. Often, you have 5-10 goals at once. It is hard to slow down and quiet your mind, but that’s ok because you like it when your mind is running at a million miles per hour.

However, the Exploration Phase is a creative phase. It’s not about execution. What helps you raise money, write product specs, ship code, and recruit candidates is completely useless in the Exploration Phase. You need to look inward, and that busy bee mentality only hinders you.

I highly recommend giving yourself long, unstructured time during this period. It’s ideal if you’re completely off work, but that’s not always possible. What is possible is controlling your schedule so that you have 3-5 hours regularly of “open time” where you do not have an agenda. This means that when a really famous potential business associate is interested in taking a meeting, you make them wait for when it fits into your schedule. You prioritize the time you’ve blocked out for cultivating ideas. Your future self will thank you. It means you don’t take meetings in the middle of the day if you can avoid it, because this stunts creative energy. You can never get into “idea flow” if you have a commitment hanging over your head, even a 30 min call with a friend.

Then, go to your happy place. Go for a long walk, a bike ride, etc. Do not put any pressure on yourself to achieve your goal of starting a company. The more pressure you put on yourself, the harder it will be to foster your creative brain. I’ve found 3 ways to do this:

1. Before Udemy, I was a college grad with no savings. I had a job at Accenture and did the bare minimum I could to get by. Mentally, my head was in the clouds for about 6 months before meeting the Udemy co-founders.

2. Before Sprig, I still didn’t have much money. I consulted at Lyft and started the Growth Hackers Conference. These were time-passing activities where I checked in for 25-30 hours per week and then had lots of free time outside of that.

3. Finally, the big kahuna. Before this company, I had ample resources and time, so I took a full 3 years off. Almost 2 years of full Exploration. Then, 1 year for the rest of the phases. 

I highly recommend being independent during this time. Do not feel too tied down work-wise. If you have a family, spend more time with your kids and really dive into their lives. If not, go travel. It is OK to spend time with others, as long as you are being mindful of not using it as a crutch. You may hang out at a friend’s office, play sports, or teach. As long as the thing you’re doing is NOT intended for the goal of finding a new startup idea. As soon as you catch yourself needing the addictive energy of a life’s purpose, you must step off. The whole point of this time is to not have purpose, and to let yourself live in the purposeless state for a while.

I’ll recognize that while this whole section sounds trite, it is devilishly difficult to do. I’ve rarely met an entrepreneur in their “in-between” phase who seems truly at peace with it. The trick is to fight through that: if you succumb to your need to work, you will not have a truly fulfilling Exploration period. Instead, get through the first two or three bouts of listlessness and force yourself to become comfortable with having little to do. That is how you foster true creativity.

As long as you are true to this wistful creative phase, it is OK to do research. In fact, I’d encourage it! Follow the BUM framework for areas you should dive into:

Business, User, Market. BUM.

Business

This is a great time to crack open books about business - biographies of famous business people, for example. I’d also recommend podcasts, watching videos of entrepreneurs, and even taking classes on the subject. Do not force yourself to be directed or purposeful, just do stuff that interests you.

Examples of books I love are Zero to One, the Hard Thing about Hard Things, the Elon Musk biography by Ashlee Vance. Books you should not be reading are High Performance Management or any other book that gets you in the “zone” of managing. You want big picture bullshit, not specific actionable advice.

For audio content, I love How I Built This, TED Radio Hour, 20MinVC and countless audiobooks on Audible. Again, avoid super industry-focused podcasts that rehash news or are focused on what happened last week. That shit is noise and you want to rise above the noise during this period.

User

If you’re building a business that sells to people (either B2B or B2C), you must have deep empathy for users. How do you do this?

1. Become one.

2. Watch them.

Become a user by accomplishing daily tasks and having a “normal” life. When you have lots of free time, you’ll notice yourself naturally spending that time on activities that are quite similar to what your future users might want to do. If you tend to spend lots of time on TikTok, great. If you love playing soccer, go play soccer. If cooking is a big passion, read cookbooks and make elaborate meals for your friends and family. If you’re a coder or designer, code or design things purely for fun. So many entrepreneurs lose touch with their human side when they get into ultra-performance mode, and that kills the creativity of knowing what humans may want or need.

I personally found myself doing so many “everyday” activities that I never used to have time for. Before Sprig, I decided to build a passion for cooking and went through most of the Four Hour Chef. Before Udemy, I became obsessed with TechCrunch and read lots of Paul Graham. Before NewCo, I learned basic Chinese, improved my Spanish, learned salsa dancing, and tried to write a book.

Funny enough, as soon as I’m knee-deep in company building, these types of activities fall by the wayside. I tend to be super efficient with time, so it’s useful to remember that being a user is an actual tactic in and of itself!

Watching them involves being a fly on the wall. Entrepreneurs are used to being the center of attention, but now is the time to let that take a backseat. Instead, watch your target audience. You may not even know who that is yet, so just put yourself in lots of different positions that may get you there. If you’re at a yoga studio, give yourself the time to introduce yourself to the yoga teacher and ask questions. If you’re meeting with a friend who works at a bank, ask them about their job, what they like and what they don’t.

Again, time gives you the opportunity to have serendipitous encounters that provide you with more information. 95% of this information will go to “waste,” as far as you can tell. That’s fine.

Market

Slowly over time, you’ll start to notice areas that you think are interesting. Mental health, fine art, payments processing. Who knows? I don’t, and neither do you. As you read books about business and behave like a user, questions will start to come to your mind. Why can’t I do x? What if I built something that does y? How would the world be different if z? Have an idea notebook (digital or physical) where you jot ideas down as they come.

x, y, and z are seeds of ideas. Too many people take these seeds and assume they will end up with a great business. Unfortunately, that’s not how it works. Historically, there have been “moments in time” when a specific business idea is actually possible or practical. If you started a mental health company between 1990-2020, you probably failed. If you built a mobile games company in 2000, you were likely too early. If you get stuck on just one market, you will almost certainly be reducing your chances of finding a timely business opportunity.

Instead, have multiple markets in mind and start to explore them. As these ideas come up, go research them. Find out what other solutions exist to problems you’ve found. Create a new note for every category (x, y, z) and start to put together the solutions that you find. Think like a user: do not go and ask other VCs or entrepreneur friends, but rather ask other users with the same problem. Remember, industry analysts never build businesses. Entrepreneurs with unique insight do. That insight comes from primary work, not secondary analyses.

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That’s it? Yes and no. The whole point of the exploration phase is to chill the fuck out. Don’t over-analyze things; instead, be a bum and let it flow. Free time will give you far more ideas than the intense energy you bring to work every day.

Alongside the BUM phase is examining your Ikigai. This is a now-famous framework that’s all over the Internet, and it is extremely powerful. The word ikigai means “a reason for being.”

Why is this important? There are two parts to this:

1. Self-reflection and awareness.

2. The convergence of who you are and what can actually work.

1. Ikigai is first and foremost an exercise in self-awareness. During your exploration phase, I highly recommend putting yourself in deep self-reflection mode. For me, that involved leaving my lifelong home of California behind and hitting the road. I find I learn more about myself traveling than during any other activity. It also means therapy, psychedelics, hiking, and long conversations with strangers. New experiences tend to push you more and force you to confront realities of yourselves you didn’t know existed.

2. The second part is often overlooked by dreamers. Ikigai is insightful because it is practical. You can’t just do whatever you want - you must figure out something you want that people are willing to pay for. In business, this is a critical mindset shift for many entrepreneurs: MOST ideas you have will not actually work right now. Timing is everything.

If you did your job in the “user study” part of BUM, you’ll start to see the difference between opportunities that are timely and ones that aren’t. If users are currently trying to solve this problem in droves without a good solution, it’s timely. If not, it likely isn’t.

As an example, when Sprig first got started we thought a vertically integrated delivery-only restaurant would be the future of restaurants. It turns out we were right, but 5 years too early. Unfortunately, building the delivery infrastructure, the food production facility and the brand turned out to be too hard. Five years later, with the rise of ghost kitchens and the proliferation of food delivery apps, this idea feels far more appropriate.

Could we have known that was true? I don’t know. What I do know is that you can at least de-risk this by really being thoughtful in the exploration phase.

Force yourself to spend at least 3, if not 6-12 months in exploration before you start a business idea. Many people do this while having other jobs (ideally one that is less demanding so you have more free time). Some take long sabbaticals, as I did. It is up to you how you accomplish the aforementioned goals, but the result should be the same: purposeless, self-reflection time.

The next post is on Research - how to take this completely unstructured data and use it to help you define a market opportunity!

Fundraising 101, Part 2: How to Raise

If you meet the timing and scalability requirements (see Part 1), you’ve done 80% of the work necessary to raise a round. 

As a reminder:

1. Raise only after you have a product in the market that customers love (ideally, they’re paying you for it).

2. Raise from angel investors only if your business can produce a 100x return to the investors within 10 years.

From there, the key is to convince investors of two things:

1. You have product/market fit, or a path to getting there.

2. If you’re right about #1, you could eventually be a $1B+ company.

Remember, this is art and not science. Here are the steps.

Start with a story.

The best companies change the world in some way that creates a new opportunity. Uber got everyone to start ordering cars from their smartphones. Slack got everyone to instant message their co-workers instead of emailing them. Udemy got millions of people to pay $10-25 for a bundle of videos that we now call “online courses”!

If investors believe it’s POSSIBLE that you could make such a change, they will give you money. Focus on explaining why such a change is possible, and craft your pitch to show them (1) your assumptions about the future, and (2) why those trends will make this change happen. 

Why is now the time when people will switch off email to messaging? What does the investor need to believe in order to get on board?

It’s OK if the investor has to believe something that’s not 100% certain. Remember, they know that 24 out of 25 of their companies will fail. So if you are, for example, hoping that VR headsets will become a major gaming platform, that’s OK. Is it 90% certain? No, but is it 10% possible? Yes.

Find the right investors.

Once you identify the underlying assumptions of your business opportunity, you have to find investors who believe you. Investors are now super public about their beliefs—sharing them on Twitter, conducting interviews, and writing blog posts. Follow these sources and really do your research. Do you know who Chris Sacca, Jason Calacanis and Li Jin are? If you don’t, you’re further away from raising capital then you think. You should know the names of at least 50 of the top 250 investors, and know what they care about.

Find the investors who are most likely to believe your underlying assumptions will come true. Who’s investing in Virtual Reality and thinks that it will be a big gaming platform? That’s your ideal investor. Are there other investors who have invested in new-platform gaming companies in the past, even if you can’t tell whether they’re into VR? Those can also be good opportunities. Someone who invests in Crypto and Marketplaces is probably not going to be interested.

At my new company, we had a 90% hit rate between first call and an investor saying yes. 90%! Why? I did my homework. (Obviously, as first-time entrepreneurs, you’ll likely get a lower hit rate—BUT you can still stack the deck in your favor by being smart about it. Even experienced entrepreneurs often get <50% hits). We only reached out to investors we knew were interested in our space, and so it was relatively easy to close them.

Get the right introduction.

How someone hears about you matters. Although investors are increasingly willing to take cold emails if the pitch is crafted right, for 50%+, you probably need an introduction. Spend the months leading up to a fundraise getting to know the players in your space—entrepreneurs who have built companies like yours in the past or executives who are “angel whisperers” in the area you are interested in.

This can be shockingly hard sometimes. At Udemy, it took us nearly a year to find people who believed in us—we tried to kiss a lot of uninterested frogs. Eventually, when we found the right people, they introduced us to investors.

Surprisingly, it doesn’t end there. Usually you need this introducer to actually go one step further and get on the phone with that investor and vouch for you. That’s the key—the more people who are vouching for your execution, the better.

If you are a first-time entrepreneur, I recommend trying to build relationships with people early and often, so they can see you execute over time. Talk to them before you have a product, and then after you launch, and then after you sign your first customer. Then, ask for an intro to investors.

Use an incubator.

The final thing I’ll say is this: if it’s your first time starting a company, I highly recommend going to an incubator and getting help from them. You may give up 3-10% of your company, but you’ll get much-needed attention and advice from people who have helped hundreds of people raise money.

If you are having trouble getting into Y Combinator, look for other industry-specific or smaller funds like TechStars, 500 Startups, or Pear’s Accelerator.

More resources:

One post can’t possibly cover everything. There are some amazing resources out there on fundraising. Pitching Hacks and YC’s How to Raise a Seed Round go in much more detail.

Fundraising 101, Part 1: When and Whether to Raise

First - a personal update. Today we announced the $4M seed round for my new company. We put together an in-depth document about the new company and the fundraise here.

With this post, I’m trying something new. This is part 1 of a 2-part series focused on fundraising advice. Please let me know what you think of this style :)

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Funding. Everyone wants it, but most fail to get it. 

This is easily the most understood subject in the startup world—at Udemy, we made every mistake in the book. I’m writing this guide because in 2009, it would’ve saved me a lot of grief.

The most important thing about fundraising is realizing that 95% of the time, you are wrong about what you need, why you need it, and when you need it. (To be clear, when I talk about “fundraising,” I’m talking about raising risk capital from investors funding tech companies).

If you’re only interested in advice about HOW to fundraise and not WHETHER to fundraise, you’ll probably fail. That’s why Part 1 of this series is about Whether and When, and Part 2 is about How.

A few rules of thumb

You should fundraise when:

• If you succeed, an angel investor could make a 100x+ return on their money. That’s 10,000%!

• You’re ready to commit 5-10 years to this business and are willing to walk away with nothing, even if the business is profitable and “successful.”

• You are willing to have a boss. Once you have investors, you have a boss. So if you started this company to have freedom, don’t raise money.

• You want to share in the outcome. If you raise money, you will likely raise more money, which means you will likely eventually have less than 25% of the company. If you have co-founders, you could have less than 5%. Today, the founders of Udemy all have very low ownership %.

You should NOT fundraise when:

• You need money. Nobody cares about your needs. How often do you buy things just because the seller NEEDS the money? Very rarely, and usually only with throwaway capital. So don’t expect investors to give you money because you need it.

• You would be happy with a $1M outcome to yourself. If $1M sounds like a lot to you, just bootstrap. You are much more likely to get $1M that way.

• Your business is not hyper-scalable. Angel investors are looking for businesses that can grow to $100M in 10 years or less. If your business is going to take longer to reach that milestone, you probably shouldn’t raise money.

To better understand this, let’s look at what’s at stake on both sides of this deal. I like to think about it in terms of two halves of the story: (1) How investors look at you, and (2) How you look at investors.

(1) How investors see your startup

Investors need 100x. Angel investing is a risky game. Startup companies have lots of ways to fail - the market doesn’t materialize, the technology doesn’t end up living up to the promise, the founders have a messy breakup, etc. We have historical numbers on this, and we know that only a small % of seed-funded companies return money to investors. Based on the historical math, investors know that they must make ~100x their capital to make money. That’s because only 1 in 25 or 1 in 50 of their investments will make money. When they do, that investment has to make back the remainder of the money they lost on the other companies.

Put another way, if I have 25 investments on 25 companies that are each at $50,000, that’s $1.25M I’ve invested. Odds are, only one of them will succeed. So, I need that company to return at least $1.25M for my money back! But I don’t just want my money back: I need a return that beats the stock market. Also, I don’t get my money back right away; I get it back 8-12 years after I invest. So, I need roughly 3x my money back on this investment for it to be better than stock market returns. My $50,000 investment in that winning company has to turn into $4M or 80x my initial investment.

I know it sounds crazy, but we have five decades of angel investing data to look to, and that’s why we know these numbers. This means you must understand how your business can get to at least 80x the initial investment. If you don’t, you probably shouldn’t raise money.

Investors care about timing. You might be building a great company, but that doesn’t mean it’s the right time for investors to fund you. At Udemy, we went out to raise for the first time in August 2009. We didn’t end up raising anything until August 2010—a year later. We wasted hundreds of hours of blood, sweat and tears trying to raise money simply because we were raising at the wrong time!

If you’re a first-time founder, you almost certainly need to have a product in the market and have customers actively using the product. Either that, or you have a few extremely good references at venture-backed startups who can vouch for you and are willing to be active advisors or (ideally) small-check angels.

If you can’t get a product to market without money, investors won’t believe you will do that much better with money. They have thousands of companies pitching them every day and many of them have thousands of dollars in revenue or tens of thousands of users.

Investors care about scale. This means it’s really important for you to understand scale. 

You need two major things here:

1. A big market opportunity

2. A solution that can grow fast

Markets are hard to define, and I won’t explain it in full here. To get a 100x return on a $25,000 investment, you probably need to get to $100M in revenue (or $1-5B in valuation). So, you’re looking for a market big enough for that kind of company. Ideally, there are already dozens of companies in your space (or in similar spaces) that are way bigger than that!

In terms of speed of growth, the key here is to understand you have to grow to $100M in revenue in 10 years. Do the math. Roughly, if you grow at 4% per week or 20% per month to start, you are on the right track. 99% of businesses can’t grow that fast, but 99% of businesses are not fit for angel investments.

(2) How I recommend seeing investors

Investors aren’t the key to success. The biggest mistake entrepreneurs make is they think they need money to succeed. Oftentimes, this is just a crutch—an illusory requirement that makes it easy for you to feel good, instead of actually doing good. 

Many entrepreneurs make the mistake of thinking “Oh, if only I had X, then I’d be successful,” when actually X is wrong. If X to you is investors, you’re wrong. It’s not investment that makes you successful; it’s customers. If you get customers and no investment, you can build a successful business. And if you get customers, you are more likely to get investment. But there are tens of thousands of startups with money that never end up getting customers and therefore do not succeed.

Taking money from investors means committing to a path. This is important. When you raise money, you commit to following a specific path. Angel investors expect you to try to build a multi-billion dollar company. That is the implicit agreement in most angel investments from credible investors.

This means you must use the money to grow as fast as possible. Usually, if you‘re trying to grow fast, that means you are spending more money than you’re making. There will also be other companies trying to compete with you: almost every good startup idea in history has been tried by many founding teams. To keep up with this competition and the expected growth rate, the average startup spends money in cycles of 18 to 24 months. Every 18-24 months, you will run out of money, and you’ll need to raise more and more capital.

Each time you raise capital, you’ll likely sell 10-40% of your business. After 2-4 rounds, investors will control more of the company then you do and will become your boss. In fact, they are your boss even from day 1, because if they’re unhappy, they can make it difficult for you not to raise follow-on rounds.

Furthermore, it often takes up to 5 years to even realize if your idea is any good. I spent 4 years on Sprig, raised $60M and eventually shut it down! I took a very low salary (about ½ or ¼ what the market would pay me) and eventually ended up with nothing.

There are many paths to success

Many people don’t realize that usually, you can actually achieve your goals by starting a regular business, rather than a venture-backed startup. If you start a business, you don’t have investors (or maybe you have a small amount of money invested from friends and family), and you don’t owe them a 100x return. Instead, you can simply build the business to profitability and then take money out of the company every year. 

If you do a great job here, you can even build it to a multi-million dollar company and make millions of dollars for yourself! I have at least a dozen friends who have done this to great effect. So, weigh your options carefully: there are many paths to success, and raising venture capital isn’t always the best one.

If you’ve read this and you’re planning to fundraise, “Part 2: How to Raise” is coming soon! Sign up below to get it when it’s ready.

Udemy’s Chicken-and-Egg Problem

This is Part 3 of a multi-part series in which I tell the story of Udemy. If you’re new, you might want to check out Part 1 and Part 2 first.

Traction, Traction, Traction.

Everyone tells you to get traction, but you feel like you need money in order to build the product to get traction. It’s the entrepreneur’s dilemma.

In a marketplace business like Udemy, this chicken-and-egg problem had to be solved multiple times. At first, we didn’t have instructors or students, so neither group could find value on our platform. In order for Udemy to work, we had to get both students and teachers to show up without the other party being on there.

This was particularly hard, because when we started, we had no money. Zero. We also had no credibility, so nobody was going to take a chance on us. Here’s what we did:

Step 1: Fake the Chicken.

When we realized a seed round was impossible, we went to the next obvious step: launch the product. I knew I could convince my contacts at TechCrunch to write about the company. But what would I send them to? A website with no teachers and no students? That wouldn’t make sense.

Eren devised a solution: there were lots of courses on the internet already. You could go on YouTube and learn practically anything. So, he built a crawler that created courses from YouTube content and imported them into Udemy. Stanford, Harvard and other famous institutions had published hundreds of videos on the internet, and so it quickly looked like Udemy.com was a place where you could watch videos from these amazing sources!

When we launched on TechCrunch and Mashable, this enabled us to have some content on Udemy. Having this content was critical for press coverage, and the launch announcement got us 10,000+ signed up users (details here)!

Sounds great right?

Sort of. On one hand, it was a life saving move. We raised our seed round based on the traction we gained (a story for another day).

On the other hand, it was kind of a bullshit move. Most of those users bounced, so it didn’t actually solve our chicken and egg problem.

Step 2: Make the Chicken.

With $1M in funding, we could now pay for users, right? Not so fast. We knew spending on advertising was a great way to run out of money. Our goal was to find a scalable, repeatable way to grow that didn’t require cash.

We were so cash conscious that we decided we wouldn’t bring on new team members until we saw authentic traction. We paid ourselves $60,000 each, kept our office in the living room of our 4 bedroom house in Palo Alto, and found a roommate on Craigslist to help reduce our costs.

It took 5 more months of grueling work before we hit our big break. I spent hours on the phone with instructors, tried to launch a poker university, started a dead-end partnership with The Learning Annex, and failed to create courses on how to meet girls.

Finally, I was sitting in the living room with our new roommate and thought: “Huh…” This guy’s name was Chris McCann, and his company StartupDigest was growing fast. It was a newsletter for startup founders, and everyone in the Valley was a subscriber.

In a fit of frustration, I thought: Fuck it, I can teach an online course myself. I just raised $1M! I could teach other people to do the same.

I asked Chris if he was interested in partnering with us, and he said sure.

Soon, we launched our first successful course: How to Raise Capital for Startups by StartupDigest University.

Obviously, as a 22-year-old who had only raised $1M, I wasn’t qualified to be the only instructor. So, I tried to recruit my investors. They invested in Udemy - of course they’d be instructors.

Once again, things were not how they appeared. Our investors were skeptical of going online and filming videos of themselves. They weren’t sure it was worth the time! Udemy was worth a small $50K check, but they were still skeptical. During one call, I asked them: “Why would you speak to a group of 50 entrepreneurs in person and then hesitate to speak to hundreds of entrepreneurs online?”

That gave me an idea. What if I held an event with 50 entrepreneurs in the crowd, and then stuck a camera in the back of the room?

So, that’s what we did. Yep, the first course on Udemy was filmed by a camera crew we hired to take videos of our instructors because at that time our investors didn’t believe it was worthwhile to speak directly into the camera!

We were vindicated in the end. After filming the courses in front of a live audience of 50 people, we posted them online. StartupDigest got 50% of the revenue, and we kept 50%. The first course did $25K in revenue in the first week! It was a thrill, and we knew we were onto something.

Step 3: Grow the Chicken.

From there, the key was to grow the marketplace as quickly as possible. We already had a winning formula, so we just repeated it:

1. Find a distribution channel (such as an email list)

2. Find an instructor who was knowledgeable about a topic the audience cared about

3. Make a deal that gives the email list 50%, the instructor 40%, and Udemy 10% of the revenue

Bam. We kept repeating that over and over for the next 1.5 years. We hired a team of marketers to build relationships with email lists, a bizdev team to recruit instructors, and a product/engineering team to meet the growing demands of our customers.

Our goal was 20% month-over-month growth, and we did everything we could to hit it. We had a massive spreadsheet of every email newsletter on the Internet, and we just kept closing deals.

This was Product-Market-Fit with a strong Go-To-Market strategy. Within 1 year, we were at a $1M run rate, and we were gearing up for our Series A. Things were humming on the inside, but it ended up being much tougher than we expected.

What you can learn from this

Some takeaways for your business:

First, do whatever you can to get your initial traction. It’s OK if you just stick a camera in the back of the room. Fake it’ til you make it.. If something doesn’t work, change your strategy. Don’t just do the same thing over and over again - keep trying new things until something works.

Second, product/market fit isn’t always obvious. In some businesses, you won’t know your product until you figure out how and where to sell it. That’s what we needed to figure out: we could monetize email newsletters better than advertising, which gave instructors a reason to work with us.

Finally, we stayed lean until we had traction. This is important -- you never know how long it’s going to take!

Next post: Lessons learned from a decade of fundraising.

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Grinding Without Hope and Udemy’s Struggle With VCs

This is part 2 of a multi-part series in which I tell the story of Udemy. If you’re new, you might want to start with part 1.

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It’s an odd feeling being an entrepreneur. At times, it feels like you have no hope. You stubbornly push forward despite hundreds of data points telling you to turn back. You pitch and pitch and pitch your heart out, while wondering if maybe the suits are right. Maybe your idea does suck. After all, 95% of startups at this stage fail.

For nearly a year, we desperately tried to raise our seed round. We had no savings and no family money. Eren and Oktay were on H1B visas and were technically not allowed to work on Udemy, lest they be deported.

As I got to know Eren and Oktay, I learned two things:

• One, these guys are brilliant. Like, truly next-level, one-in-a-million type of brilliance.

• Two, as Adeo liked to say, “Nobody can understand what the fuck they are saying.”

Like most countries, Turkey has a completely insane education system. The schools must hire “local” teachers, because the government is expected to keep jobs inside the country. So, subjects like English suffer, since you have very few native speakers who want to be teachers. So, your English teachers suck and you hold your country back, all in the name of giving local people jobs. The USA does the same thing, which is why my Spanish is no bueno.

You can see why we wanted to democratize access to education; all three of us had fallen prey in some sense to the modern education system.

So, I was going to be the glorified translator. The junior business guy with a $100 suit and a big mouth.

I took it like a man and worked for free, with no expectation of compensation. I joined a project at Accenture in Roanoke, Virginia, so I could use the travel stipend to make trips back to San Francisco each week.

Toiling with No Hope

My workload at Accenture jumped to 70 hours per week. I’d arrive at the soulless office park in Roanoke on Monday and stay there until 2am, perfecting Excel models for clients who would never use them.

On Thursday night, I’d fly from Roanoke to San Francisco, where an air mattress awaited me in Eren and Oktay’s spare bedroom. On Friday, I’d split time between Accenture and Udemy. We worked as a team on Saturday. On Sunday, I’d take half a day to see my girlfriend in Berkeley. Sunday night, I’d take the 11pm redeye to Chicago, get 4.5 hours of fitful sleep, transfer flights, change into formal clothes in the airport bathroom and do it all over again.

My job was to get users for the site and to pitch investors. I was doing a decent enough job, but it was slow going. Eren would stay up until 4am every night and then go to work again at 9am.

After four months of grinding, we finally had “the conversation.” Who would have what role? How would we split the equity?

Eren was obviously CEO, but what would I be? These two coveted software engineers were working at a venture-backed startup and I had no real experience. On top of that, they had worked on Udemy for 2 years prior to my arrival.

Eren was quite generous and offered me a co-founder role. We agreed to divide up the equity almost equally: 4x for me, 5x each for Eren and Oktay. I got the title “President,” which didn’t mean anything, but it felt about right.

When Paul Graham called Udemy a “tarpit”

I spent every spare minute emailing and setting up phone calls with investors and users.

I had tried everything, but nobody would bite. Eren and Oktay were still building the product. In retrospect, I think they had “launch anxiety” and were delaying the launch date.

The investors were cordial, but no one wanted to invest in education. Our exchange with Y Combinator is probably the best example of this:

Paul Graham:

You guys seem intrepid, but this idea is a tarpit. We get several vague proposals for tutoring marketplaces every cycle.

Try answering this hypothetical question: if someone wanted to build something that would make lots of money starting from the beginning, what would you suggest they do? Surely a tutoring marketplace would not be your first suggestion.

What do you need so much you'd pay for it?

Since 2/3 of you have experience in dating, why don't you work on something related to that?

Gagan:

Thanks for the opportunity to discuss this with you further. We're not a tutoring marketplace, and we must have done a poor job of messaging during our application. I apologize for that. We completely agree that tutoring marketplaces won't make much money - and have little potential to become big. That's because they focus on one-on-one learning and on replacing an interaction that requires face-to-face meetings. We're completely different. We are focusing on content that is one-to-many and are trying to become a place where users have thousands of courses they can watch and learn from. We plan to aggregate the educational content on the internet and provide users with a one-stop shop to learn.

Furthermore, people pay for online education regularly; its a $25B industry and over $1B is spent in the US alone on online courses that are not tied to a professional or university program. Lynda.com is a great example of a company that targets the same user base.

Ultimately, we offer tools to enable anyone to create a Lynda.com. Course creators don't have to be individuals and we don't expect them to interact one-on-one with users. We expect people to put up videos and then others to come watch and subscribe to those courses. We also expect some online instructors to hold live courses with tens of students in attendance, similar to EduFire's entrepreneurship series. There are thousands of in-person seminars held around the country on a wide range of topics, from OpenGL for the iPhone to Spirituality and Vedic medicine. Many of these can be replaced by online courses on our site.

That said, we're not opposed to changing the business plan. The technology we've got is amazing and it wows everyone who sees it (including investors and CEO's of startups at TechCrunch50 - we got tons of follow-up). We've got a live learning platform that is extremely easy-to-use, flexible and scalable. We'd love the opportunity to show you it before you write us off (because it could be re-purposed for something else if necessary).

Finally, re: 2 of us are experienced in dating. They've also got experience in online video, viral marketing and user-generated content. A lot of the same things that made them successful with SpeedDate.com can transfer to Udemy. If you still aren't convinced, let us give you a demo. The site is literally weeks away from launch, so you'll at least see a functioning product during our meeting and can make a determination there if you think we could morph into something that isn't a tarpit.

Trevor Blackwell:

Can you guess what fields will be popular for your kind of teaching? Using office software like Lynda? K-8? Quantum mechanics? Astrology?

Gagan:

Thanks for the followup. We've got a good idea based on what has been successful on the internet and via video/DVD-based learning to-date.

We expect this to not appeal much to K-12 (that market is fairly saturated). Instead, we see this site as being a place to learn the stuff people don't want to go to school for but still want to learn. Here are some categories that we think will be successful:

Casual learning (see The Teaching Company: teach12.com)

• These are general knowledge courses on anything from "String Quartets of Beethoven" to "Art of Critical Decision Making" to "American Civil War"

• For people who want to learn the interesting material of college classes without attending a university or paying the tuition fees

• Students pay $100 for 24-lecture DVD sets

• Company was acquired by a private equity firm recently

IT Education (see Lynda and the hundreds of indie sites such as javavideos.net)

• Self-explanatory. For people who are interested in learning a trade and either earning a living off of it or casually coding / using photoshop in their free time.

• This is an enormous industry dominated by various technical schools and sites like lynda.com.

Test Preparation

• Sites such as brighstorm.com and tutorvista.com are seeing solid traction in this space. We think they cost too much and don't provide enough teacher options, and that's why we can compete. Also, tutor sites don't allow for recorded do-it-yourself content and brightstorm doesn't allow for one-on-one question and answer.

Ultimately, there are dozens more - yoga, cooking, how-to videos, photography. But we assure you we won't try to conquer them all in our early days. We will focus on a few (2-3) specific verticals and build density in those to gain traction, evolve our product, and prove the concept. Then, we will slowly expand into other verticals.

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What’s fascinating about this is:

1. Paul Graham actually dug this up for me. I admire him deeply, and it shows how much of a class act he is that he would give us permission to share this.

2. YC quickly changed their tune, and later even joined forces with Geoff Ralston’s Imagine K12, an education-focused incubator. Things change, and timing matters.

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We applied to YC three times but never got an interview. Simultaneously, I was pitching angel investors, and by February 2010, I was finally getting some interest. Eren even had a Turkish billionaire thinking of investing!

Juggling Accenture and Udemy, while simultaneously writing for TechCrunch, was getting to be too much.

I had saved about $5,000 by that point, and my co-founders still had full-time jobs. I remember going to them and saying,

“Guys, I think we can raise money. But if this doesn’t work out, I’ve got almost no savings, so will you cover me if that happens?”

We finally incorporated the business. I quit Accenture, flew back to San Francisco, and immediately started hitting the pavement.

Within 3 weeks, we had met everyone on our lead list. They all said no.

We had one ace up our sleeve: the billionaire from Turkey. He was going to invest $500K.

Unfortunately, he dropped off. Eren emailed him several times, but we never heard from him again. We were stuck.

It was a decisive failure. It stung. I was frustrated.

I still thought Udemy was a good idea. The arguments made by investors didn’t make sense to me; they seemed to not “get it.” I took the feedback and constantly improved the pitch, but it wasn’t enough. Pretty soon, we’d exhausted all of our contacts. We knew we had to do something different before we could move forward.

Why the pitch failed

In retrospect, there were a few major problems with our pitch:

First, we hadn’t launched yet. It was a major red flag, but nobody told us directly. Investors don’t want to gain a reputation for offending entrepreneurs, so they tend to be indirect.

Second, I was pitching, but Eren was CEO. We don’t know how much this affected things, but it was certainly a bit atypical.

Finally, we’d picked an industry nobody liked. At the time, online education seemed like a “tarpit” to most investors.

So we decided we had to get traction. Traction. Traction. That was the goal.

But how? We were a two-sided marketplace—traction would mean getting both instructors and students. How do you get instructors to teach on Udemy without any students? How do you get students to learn without any instructors? We couldn’t have teachers without students any more than we could have students without teachers.

Next post: Solving the chicken-and-egg problem, and raising a seed round.

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Udemy: A Product of Recession

This is Part 1 of a multi-part series in which I tell the story of Udemy. Here’s Part 2, and here’s Part 3.

When a recession hits, it feels like the world is falling apart. That’s how I felt in 2008. I was a recent college graduate with few marketable skills I had never heard of Silicon Valley. I had no idea what a VC was. My mother had just lost her job, and I was pretty sure I was about to lose my own job as a first-year analyst at Accenture.

All of us first-year analysts were freaking the fuck out.

It wasn’t clear what Accenture was going to do. It hadn’t yet responded to the economic crisis, and we were just waiting for the hammer to drop.

Finally, I got an ominous email from Accenture management. 

Paraphrasing the subtext, it said this:

To all first-year analysts, 

[As you know, the economy is going to shit. This has severely impacted Accenture’s business]. As part of our restructuring, we are asking some Analysts to move to Washington, DC where the government is still paying its bills and hiring us for projects! If enough Analysts move, we may just save all of your jobs.

Whew. Thank goodness I still have my job.

But shit, I thought. Washington, DC? I knew almost nobody there, and my girlfriend was still going to school at UC Berkeley. The Bay Area was my lifelong home, but these were desperate times. I moved to DC.

It was necessary, but it sucked. I knew I wanted to get back to the Bay Area, but didn’t think I could do it during a recession.

I did have one friend in DC: Vikrum, a high school buddy who was climbing the ranks on Capitol Hill. He was well-connected and smart. I told him about my hopes to go back to the Bay Area to work in tech. Then he gave me the most valuable tip I’ve ever gotten:

“You know, if you’re interested in technology, you should check out this blog called TechCrunch. It’s what all my friends read.”

Today, this sounds inconsequential. Anyone reading this knows about TechCrunch, VentureHacks, AngelList, and VC blogs. They’re practically mainstream today. But at that time, their existence was a revelation to me—a whole world of content and knowledge at my fingertips!

I couldn’t get enough. I read every damned article and clicked every link in every article. Soon, I was a TechCrunch junkie who knew way too much about the writing styles and personal lives of John Biggs, Leena Rao, and Michael Arrington. 

That was when I discovered the first secret to Silicon Valley: in order to get into the industry, you must act like an insider. Everything is online; you can watch people tweet and post and conduct business out in the open. Nobody takes you seriously unless you model the behavior and follow the unwritten code of conduct.

By obsessing over TechCrunch and VC blogs, I was working toward being an insider (mostly during the inevitable dead time I had working with the government). I didn’t know it at the time, but that would pay off very soon.

Two Big Breaks

One fateful week, two posts showed up on TechCrunch.

First was a post on MobileCrunch, TechCrunch’s much smaller and less important sister blog. They were hiring unpaid interns to write app reviews and other less challenging journalistic tasks.

Second was a post on the Founder Institute, a new technology incubator that was for companies in the idea stage. You didn’t have to have a co-founder, be an engineer or have an idea to join.

I applied, and got in, to both. It was a stunning and quick turn of events and I’d done it entirely based on “hacking” the system.

I got the job at TechCrunch because I knew the writing style of Greg Kumparak, the editor of MobileCrunch. I’d been reading his posts for months and copied his style to a T in my application form. Within hours, he responded:

You’re in. You start tomorrow.

I was stunned. I was about to go from not knowing that this world existed to writing articles for its top news site in 4 months flat.

A few days later, I also got into the Founder Institute using the same strategy. I’d watched plenty of YouTube videos about “what makes a good founder” and read Paul Graham’s various posts on the subject. So I wrote answers like that in my application form and was accepted.

Now I was both a “founder” and a tech reporter. For now, I was juggling those roles while still working at Accenture—but soon, my life was about to change completely. 

Taking Advantage of Opportunities

There were many interns at MobileCrunch and lots of founders in the Founder Institute. I had come a long way, but my chances of success were still slim. Most of my peers would eventually fail.

Why did I succeed?

I think I had the right combination of ambition and opportunism. And, of course, a bit of luck.

At MobileCrunch, I was obsessed with the numbers. I knew that if a post got on TechCrunch, it would have 5-10x more readership than if it was just on MobileCrunch. Soon, I realized that anyone—even interns—could write a post that got on TechCrunch. It just had to be about the right subject.

So I “hacked” my role at MobileCrunch by steering my efforts towards tech news and funding rounds. Soon, I went from some intern schmuck to a regular byline on the homepage of the technology industry’s top news site.

The Founder Institute was trickier. You can’t hack your way into being a founder: you have to actually build something that people want. I worked on lots of ideas and talked to lots of potential co-founders during that summer, but nothing was clicking.

I was a “founder” in name only. One of my ideas was a grand vision to build an online education company that would hire great in-person teachers to offer video courses online, but I couldn’t convince technical co-founders to join me.

Adeo, the founder of the Founder Institute, sent me a stern email: 

If you don’t have a company in 3 weeks, I’m kicking you out.

Adeo had a reputation for following through on such threats, and I was worried all my hard work was going to be for naught. Luckily, he gave me an out.

He introduced me to these “Turkish guys” who were starting a company called Udemy.

Udemy was similar to my idea, but with one key difference: instead of hiring the instructors, Eren and Oktay proposed that anyone could be an instructor. It was going to be like YouTube for education.

Many people missed this opportunity: there were 50 other business co-founders in the Founder Institute class who did not join the Udemy team for myriad reasons.

This was made harder because Eren and Oktay had thick Turkish accents, making them difficult to understand for most White Americans.

Fortunately, I had traveled a ton as a child and was used to strange accents. After a somewhat rough Skype conversation filled with “Can you repeat that?” and “Sorry, it’s hard to hear you,” we eventually got to the demo of Udemy.com.

That’s when I saw Eren’s vision, and I saw that it was 1,000x better than mine. Democratize education completely by enabling anyone to become a teacher? It was crazy, but I liked it. This was important: Eren was clearly the leader of this venture, and if I joined, I’d have to give up the CEO spot to him, to work toward his vision and his view of the future. But the vision was good enough that I agreed to try it out, and I started working with them within a few days. No contract, no title, no equity.

We were a trio of misfits. We couldn’t afford to go full-time so we kept our existing jobs. We had no savings, were new to the Valley, and had no prospects for raising money.

It was a start, though, and we forged ahead.

Going from Nobody to Somebody in Silicon Valley

In retrospect, there are a few keys to getting into Silicon Valley:

First, observe and copy. Watch how people act and mimic them. This will help you ingratiate yourself quickly.

Second, take shots. Perfectly said by hockey Hall of Famer Wayne Gretzky: "You miss 100% of the shots you don't take."

Third, find your edge. For me, it was writing. Each person has a different edge and needs to find a way in. Take what you can get; don’t let your pride get in the way of a great opportunity. Use your talents every chance you get.

Finally, fake it until you make it. Don’t lie, though—it will come back to bite you. However, don’t undersell yourself either. Strike a balance.

Next post: the earliest challenges of Udemy — failing through 150+ investor pitches.

Thanks again for reading this. I write sporadically, but when I do publish something, I try to make it interesting. Subscribe here so you’ll never miss a post.