Not
Spending It
When and if you get an infusion
of real money from investors, what should you do with it? Not spending 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.
Should
You?
But should you start a company?
Are you the right sort of person to do it? If you are, is it worth it?
More people are the right sort of
person to start a startup than realize it. That’s the main reason I wrote this.
There could be ten times more startups than there are, and that would probably
be a good thing.
I was, I now realize, exactly the
right sort of person to start a startup. But the idea terrified me at first. I
was forced into it because I was a Lisp hacker. The company I’d been consulting
for seemed to be running into trouble, and there were not a lot of other
companies using Lisp. Since I couldn’t bear the thought of programming in
another language (this was 1995, remember, when “another language” meant C++)
the only option seemed to be to start a new company using Lisp.
I realize this sounds
far-fetched, but if you’re a Lisp hacker you’ll know what I mean. And if the
idea of starting a startup frightened me so much that I only did it out of
necessity, there must be a lot of people who would be good at it but who are
too intimidated to try.
So who should start a startup?
Someone who is a good hacker, between about 23 and 38, and who wants to solve
the money problem in one shot instead of getting paid gradually over a
conventional working life.
I can’t say precisely what a good
hacker is. At a first rate university this might include the top half of
computer science majors. Though of course you don’t have to be a CS major to be
a hacker; I was a philosophy major in college.
It’s hard to tell whether you’re
a good hacker, especially when you’re young. Fortunately the process of
starting startups tends to select them automatically. What drives people to
start startups is (or should be) looking at existing technology and thinking,
don’t these guys realize they should be doing x, y, and z? And that’s also a
sign that one is a good hacker.
I put the lower bound at 23 not
because there’s something that doesn’t happen to your brain till then, but
because you need to see what it’s like in an existing business before you try
running your own. The business doesn’t have to be a startup. I spent a year
working for a software company to pay off my college loans. It was the worst
year of my adult life, but I learned, without realizing it at the time, a lot
of valuable lessons about the software business. In this case they were mostly
negative lessons: don’t have a lot of meetings; don’t have chunks of code that
multiple people own; don’t have a sales guy running the company; don’t make a
high-end product; don’t let your code get too big; don’t leave finding bugs to
QA people; don’t go too long between releases; don’t isolate developers from
users; don’t move from Cambridge to Route 128; and so on. [8] But negative
lessons are just as valuable as positive ones. Perhaps even more valuable: it’s
hard to repeat a brilliant performance, but it’s straightforward to avoid
errors. [9]
The other reason it’s hard to
start a company before 23 is that people won’t take you seriously. VCs won’t
trust you, and will try to reduce you to a mascot as a condition of funding.
Customers will worry you’re going to flake out and leave them stranded. Even
you yourself, unless you’re very unusual, will feel your age to some degree;
you’ll find it awkward to be the boss of someone much older than you, and if
you’re 21, hiring only people younger rather limits your options.
Some people could probably start
a company at 18 if they wanted to. Bill Gates was 19 when he and Paul Allen
started Microsoft. (Paul Allen was 22, though, and that probably made a
difference.) So if you’re thinking, I don’t care what he says, I’m going to
start a company now, you may be the sort of person who could get away with it.
The other cutoff, 38, has a lot
more play in it. One reason I put it there is that I don’t think many people
have the physical stamina much past that age. I used to work till 2:00 or 3:00
AM every night, seven days a week. I don’t know if I could do that now.
Also, startups are a big risk
financially. If you try something that blows up and leaves you broke at 26, big
deal; a lot of 26 year olds are broke. By 38 you can’t take so many risks--
especially if you have kids.
My final test may be the most
restrictive. Do you actually want to start a startup? What it amounts to,
economically, is compressing your working life into the smallest possible
space. Instead of working at an ordinary rate for 40 years, you work like hell
for four. And maybe end up with nothing-- though in that case it probably won’t
take four years.
During this time you’ll do little
but work, because when you’re not working, your competitors will be. My only
leisure activities were running, which I needed to do to keep working anyway,
and about fifteen minutes of reading a night. I had a girlfriend for a total of
two months during that three year period. Every couple weeks I would take a few
hours off to visit a used bookshop or go to a friend’s house for dinner. I went
to visit my family twice. Otherwise I just worked.
Working was often fun, because
the people I worked with were some of my best friends. Sometimes it was even
technically interesting. But only about 10% of the time. The best I can say for
the other 90% is that some of it is funnier in hindsight than it seemed then.
Like the time the power went off in Cambridge for about six hours, and we made
the mistake of trying to start a gasoline powered generator inside our offices.
I won’t try that again.
I don’t think the amount of
bullshit you have to deal with in a startup is more than you’d endure in an
ordinary working life. It’s probably less, in fact; it just seems like a lot
because it’s compressed into a short period. So mainly what a startup buys you
is time. That’s the way to think about it if you’re trying to decide whether to
start one. If you’re the sort of person who would like to solve the money
problem once and for all instead of working for a salary for 40 years, then a
startup makes sense.
For a lot of people the conflict
is between startups and graduate school. Grad students are just the age, and
just the sort of people, to start software startups. You may worry that if you
do you’ll blow your chances of an academic career. But it’s possible to be part
of a startup and stay in grad school, especially at first. Two of our three
original hackers were in grad school the whole time, and both got their
degrees. There are few sources of energy so powerful as a procrastinating grad
student.
If you do have to leave grad
school, in the worst case it won’t be for too long. If a startup fails, it will
probably fail quickly enough that you can return to academic life. And if it
succeeds, you may find you no longer have such a burning desire to be an
assistant professor.
If you want to do it, do it.
Starting a startup is not the great mystery it seems from outside. It’s not
something you have to know about “business” to do. Build something users love,
and spend less than you make. How hard is that? |
/1 
