How To Startup! PART 3 Not Spending It

Read previous part here. When and if you get an infusion of real money from investors, what should you do with it? Not spend it, that's what. In nearly every startup that fails, the proximate cause is running out of money. Usually there is something deeper wrong. 

But even a proximate cause of death is worth trying hard to avoid. During the Bubble many startups tried to "get big fast." Ideally this meant getting a lot of customers fast. But it was easy for the meaning to slide over into hiring a lot of people fast. Of the two versions, the one where you get a lot of customers fast is of course preferable. But even that may be overrated. 

The idea is to get there first and get all the users, leaving none for competitors. But I think in most businesses the advantages of being first to market are not so overwhelmingly great. Google is again a case in point. When they appeared it seemed as if search was a mature market, dominated by big players who'd spent millions to build their brands: Yahoo, Lycos, Excite, Infoseek, Altavista, Inktomi. Surely 1998 was a little late to arrive at the party. 

But as the founders of Google knew, brand is worth next to nothing in the search business. You can come along at any point and make something better, and users will gradually seep over to you. As if to emphasize the point, Google never did any advertising. They're like dealers; they sell the stuff, but they know better than to use it themselves. 

The competitors Google buried would have done better to spend those millions improving their software. Future startups should learn from that mistake. Unless you're in a market where products are as undifferentiated as cigarettes or vodka or laundry detergent, spending a lot on brand advertising is a sign of breakage. 

And few if any Web businesses are so undifferentiated. The dating sites are running big ad campaigns right now, which is all the more evidence they're ripe for the picking. (Fee, fie, fo, fum, I smell a company run by marketing guys.)We were compelled by circumstances to grow slowly, and in retrospect it was a good thing. The founders all learned to do every job in the company. As well as writing software, I had to do sales and customer support. 

At sales I was not very good. I was persistent, but I didn't have the smoothness of a good salesman. My message to potential customers was: you'd be stupid not to sell online, and if you sell online you'd be stupid to use anyone else's software. Both statements were true, but that's not the way to convince people. I was great at customer support though. 

Imagine talking to a customer support person who not only knew everything about the product, but would apologize abjectly if there was a bug, and then fix it immediately, while you were on the phone with them. Customers loved us. 

And we loved them, because when you're growing slow by word of mouth, your first batch of users are the ones who were smart enough to find you by themselves. There is nothing more valuable, in the early stages of a startup, than smart users. If you listen to them, they'll tell you exactly how to make a winning product. And not only will they give you this advice for free, they'll pay you.

We officially launched in early 1996. By the end of that year we had about 70 users. Since this was the era of "get big fast," I worried about how small and obscure we were. But in fact we were doing exactly the right thing. Once you get big (in users or employees) it gets hard to change your product. That year was effectively a laboratory for improving our software. 

By the end of it, we were so far ahead of our competitors that they never had a hope of catching up. And since all the hackers had spent many hours talking to users, we understood online commerce way better than anyone else.

That's the key to success as a startup. There is nothing more important than understanding your business. You might think that anyone in a business must, ex officio, understand it. Far from it. Google's secret weapon was simply that they understood search. I was working for Yahoo when Google appeared, and Yahoo didn't understand search. I know because I once tried to convince the powers that be that we had to make search better, and I got in reply what was then the party line about it: that Yahoo was no longer a mere "search engine." 

Search was now only a small percentage of our page views, less than one month's growth, and now that we were established as a "media company," or "portal," or whatever we were, search could safely be allowed to wither and drop off, like an umbilical cord. 

Well, a small fraction of page views they may be, but they are an important fraction, because they are the page views that Web sessions start with. I think Yahoo gets that now. Google understands a few other things most Web companies still don't. 

The most important is that you should put users before advertisers, even though the advertisers are paying and users aren't. One of my favorite bumper stickers reads "if the people lead, the leaders will follow." 

 Paraphrased for the Web, this becomes "get all the users, and the advertisers will follow." More generally, design your product to please users first, and then think about how to make money from it. If you don't put users first, you leave a gap for competitors who do. 

To make something users love, you have to understand them. And the bigger you are, the harder that is. So I say "get big slow." The slower you burn through your funding, the more time you have to learn. 

The other reason to spend money slowly is to encourage a culture of cheapness. That's something Yahoo did understand. David Filo's title was "Chief Yahoo," but he was proud that his unofficial title was "Cheap Yahoo." Soon after we arrived at Yahoo, we got an email from Filo, who had been crawling around our directory hierarchy, asking if it was really necessary to store so much of our data on expensive RAID drives.

 I was impressed by that. Yahoo's market cap then was already in the billions, and they were still worrying about wasting a few gigs of disk space. When you get a couple million dollars from a VC firm, you tend to feel rich. It's important to realize you're not. A rich company is one with large revenues. 

This money isn't revenue. It's money investors have given you in the hope you'll be able to generate revenues. So despite those millions in the bank, you're still poor. 

For most startups the model should be grad student, not law firm. Aim for cool and cheap, not expensive and impressive. For us the test of whether a startup understood this was whether they had Aeron chairs. The Aeron came out during the Bubble and was very popular with startups. 

 Especially the type, all too common then, that was like a bunch of kids playing house with money supplied by VCs. We had office chairs so cheap that the arms all fell off. This was slightly embarrassing at the time, but in retrospect the grad-studenty atmosphere of our office was another of those things we did right without knowing it. 

Our offices were in a wooden triple-decker in Harvard Square. It had been an apartment until about the 1970s, and there was still a claw-footed bathtub in the bathroom. 

It must once have been inhabited by someone fairly eccentric, because a lot of the chinks in the walls were stuffed with aluminum foil, as if to protect against cosmic rays. When eminent visitors came to see us, we were a bit sheepish about the low production values. 

But in fact that place was the perfect space for a startup. We felt like our role was to be impudent underdogs instead of corporate stuffed shirts, and that is exactly the spirit you want. An apartment is also the right kind of place for developing software. 

Cube farms suck for that, as you've probably discovered if you've tried it. Ever notice how much easier it is to hack at home than at work? So why not make work more like home? When you're looking for space for a startup, don't feel that it has to look professional. 

Professional means doing good work, not elevators and glass walls. I'd advise most startups to avoid corporate space at first and just rent an apartment. 

You want to live at the office in a startup, so why not have a place designed to be lived in as your office? Besides being cheaper and better to work in, apartments tend to be in better locations than office buildings. And for a startup location is very important. 

The key to productivity is for people to come back to work after dinner. Those hours after the phone stops ringing are by far the best for getting work done. Great things happen when a group of employees go out to dinner together, talk over ideas, and then come back to their offices to implement them. 

So you want to be in a place where there are a lot of restaurants around, not some dreary office park that's a wasteland after 6:00 PM. Once a company shifts over into the model where everyone drives home to the suburbs for dinner, however late, you've lost something extraordinarily valuable. God help you if you actually start in that mode. 

If I were going to start a startup today, there are only three places I'd consider doing it: on the Red Line near Central, Harvard, or Davis Squares (Kendall is too sterile); in Palo Alto on University or California Aves; and in Berkeley immediately north or south of campus. These are the only places I know that have the right kind of vibe. 

The most important way to not spend money is by not hiring people. I may be an extremist, but I think hiring people is the worst thing a company can do. To start with, people are a recurring expense, which is the worst kind. 

They also tend to cause you to grow out of your space, and perhaps even move to the sort of uncool office building that will make your software worse. But worst of all, they slow you down: instead of sticking your head in someone's office and checking out an idea with them, eight people have to have a meeting about it. 

So the fewer people you can hire, the better. During the Bubble a lot of startups had the opposite policy. They wanted to get "staffed up" as soon as possible, as if you couldn't get anything done unless there was someone with the corresponding job title. That's big company thinking. Don't hire people to fill the gaps in some a priori org chart. 

The only reason to hire someone is to do something you'd like to do but can't. If hiring unnecessary people is expensive and slows you down, why do nearly all companies do it? I think the main reason is that people like the idea of having a lot of people working for them. This weakness often extends right up to the CEO. 

If you ever end up running a company, you'll find the most common question people ask is how many employees you have. This is their way of weighing you. It's not just random people who ask this; even reporters do. And they're going to be a lot more impressed if the answer is a thousand than if it's ten. This is ridiculous, really. If two companies have the same revenues, it's the one with fewer employees that's more impressive. 

When people used to ask me how many people our startup had, and I answered "twenty," I could see them thinking that we didn't count for much. I used to want to add "but our main competitor, whose ass we regularly kick, has a hundred and forty, so can we have credit for the larger of the two numbers?" 

 As with office space, the number of your employees is a choice between seeming impressive, and being impressive. Any of you who were nerds in high school know about this choice. Keep doing it when you start a company.

 

 

 

Source: http://paulgraham.com/start.html