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Paul Graham Explains How to Start a Startup
woginuk writes "Paul Graham has posted a new essay on his website on how to start a startup. According to him 'You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible. Most startups that fail do it because they fail at one of these. A startup that does all three will probably succeed.'
How difficult can that be? So go start them startups."
from a successful venture capitalist.
"I'd rather be a lightning rod than a seismometer." -Ken Kesey
This was the thing that absolutely amazed me with the startup fever in the 1990's. I had a couple of friends I visited in the bay area who were with startups that had essentially no existing product, infrastructure or long term plan. Yet, they had an idea which inspired VCs to pour money down their throats. It made for a surreal situation where twenty-somethings were driving Ferrari's and Porsche's all purchased on the value of their existing stock. The parties were amazing and the whole atmosphere was one of incredulity. Of course we all know what happened.
I know one guy who bought a house, Lamborghini, Ferrari, matching Range Rovers for he and his girlfriend and loaded the house with furniture and electronics. The scary thing was that all of these purchases were made from loans based on the value of his stock holdings (because presumably he did not want to sell his stock). When the stock dropped through the floor along with everybody else, he had to come due. It was an absolute firesale and the only thing he kept was the big empty house, for which he had to struggle to make the payments. Moral? Live frugally and don't buy much on credit, especially leveraged against your holdings in your company.
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First, I have excellent fucking people skills, I understand that people just want to be left alone and I didn't spend ANY money on that! Where is my friggin' BMW at?
to start with good people, to make something customers actually want, and to spend as little money as possible.
"Check with the Patent Office beforehand" should definitely be in there.
The coolest voice ever.
was back during the bubble, I worked for a start-up. Note the past tense.
and on the subject of NOTEs take a look at number 2 from his list of notes at the bottom of the article (I included only the first 2)
Notes
[1] Google's revenues are about two billion a year, but half comes from ads on other sites.
[2] One advantage startups have over established companies is that there are no discrimination laws about starting businesses. For example, I would be reluctant to start a startup with a woman who had small children, or was likely to have them soon. But you're not allowed to ask prospective employees if they plan to have kids soon. Believe it or not, under current US law, you're not even allowed to discriminate on the basis of intelligence. Whereas when you're starting a company, you can discriminate on any basis you want about who you start it with.
The rock, the vulture, and the chain
And what it took me was. commitment, good people, never sleeping, and a truck load of beer.
But really, starting a company is the scarest thing i have ever done, I was lucky, im past the 10 year mark and past the daily effects of cash flow. which brings me to the secret of starting a business....
CASH FLOW - CASH FLOW - CASH FLOWYou need cash to start, you need to sell the product, you need people to actuall pay you for it so you can build or sell more product, so people will at some point actually pay for it....... and on and on..
It doesn't matter how good you or your people or your product or whatever. It matters how good you collect the debts owed to you so you can either reinvest it or pay off the bank interest rates.
CASH FLOW - CASH FLOW - CASH FLOW
Damn which reminds me, SEND CASH!
There is one and only one thing that a startup needs. And that is the infamous: "???"
My beliefs do not require that you agree with them.
From Guy's website:
The Art of the StartWhen you get pregnant, you read What to Expect When You're Expecting. When you get laid off, you read What Color is Your Parachute?. When you get entrepreneurial, you read The Art of the Start.
This book is a weapon of mass construction. My goal was to provide the definitive guide for anyone starting anything. It builds upon my experience as an evangelist, entrepreneur, and most recently, as a venture capitalist who found, fixed, and funded startups.
The book is as relevant for two guys in a garage starting the next Google as social activists trying to save the world. GIST: cuts through the theoretical crap, theories and gets down to the real-world tactics of pitching, positioning, branding, recruiting, bootstrapping, and rainmaking.
When nerds are unbearable it's usually because they're trying too hard to seem smart. But the smarter they are, the less pressure they feel to act smart. So as a rule you can recognize genuinely smart people by their ability to say things like "I don't know," "Maybe you're right," and "I don't understand x well enough."
This paragraph is one that some PHBs could study to their benefit. I once was associated (fortunately only in a consulting capacity) with a start-up boss who hired, as his marketing person, one of the most obnoxious people I have ever met. He (marketing guy) was constantly mentioning that he was a member of Mensa. For some odd reason, this did not go over too well with potential customers.
When someone makes a point of telling me how honest he is, I make sure to count my fingers after we shake hands. My reaction to people who tell me how smart they are is similar.
Except thanks to the new bankruptcy reform bill passed yesterday, it's raising the opportunity costs on small business owners.
Often, even with a decent business plan, banks will require people to take out personal loans to get a small business started. With yesterdays new bill that benefits banks and credit card companies, people will have fewer opportunities to get out from the debt they created while trying to get a business off the ground.
With less of an incentive to create new opportunities, I feel that this will hurt the ability of America to be a leader in "innovation".
--You will rephrase your request for me to go to hell. Goto statements are not acceptable programming constructs
In particular, you don't need a brilliant idea to start a startup around.
I'd like to second this idea and expand on it. Customers, especially business customers, prize consistent performance above uber-brilliance and cutting-edge innovation. They (and I) would rather buy a reliable product/service and give up on a few cutting-edge features (compare Google's plain text to Yahoo's overloaded graphics).
Our company does well because we always deliver what we promise and try to under-promise/over-deliver if possible. The result is that we don't have to spend any money on marketing because referrals and word-of-mouth do the trick. The money not spent on marketing goes into doing a better job for our clients and so the cycle continues.
Competence beats brilliance when the product or service is too important to risk on the unknown. I'm not recommending mediocrity, only suggesting the quality of execution is more important than brilliance of ideas. Of course, if you have both a brilliant idea that is useful and that is flawlessly executed, then you can't help but win.
Two wrongs don't make a right, but three lefts do.
As a (somewhat) successful entrepreneur, I take exception to your statement. I've been running my own network services company for about a year now. I started it up with practically nothing. Granted, it's nothing as sexy as working on the next killer app with a staff of 3 dozen people, but it was a startup. And it was done without having to sell my soul to a VC vulture.
It's been my fulltime job since I started. My truck was fully paid for before I started, I live in a cheap one-bed apartment and I have three cases of ramen in my pantry as I write this. But, my bills are always paid on time and I have enough cash to grow my biz. In fact, I just leased a tiny bit office space last week. I had been working exclusively out of my home.
You don't need a lot of money to be successful. The #1 thing, by far, that you need is dogged persistence. It's rough and can be very nerve wracking. You have to have the ability to hang in there.
And.... since it's on-topic, I'm going to plug the messageboard in my sig. I started it a couple of weeks ago to help others in my situation. It pays to learn from other's mistakes and it's great to have the moral support. If you run your own biz or are thinking about starting one, please come check us out: SmallBizGeeks.com
Entrepreneur : (noun), French for "unemployed"
1. Work with honest people. Honest people won't be lazy slackers.
2. Single founder is great if you can do it. If you are going to have multiple founders or board members the rule is "odd numbers" no tie votes. But honestly...if you can do it yourself you will be better off.
3. Investors are a bad idea. They will be in your business in a bad way. If things don't work out and 9 out of 10 start ups fail ... the guilt will eat you alive especially if you go the friends and families route that VC push hard on beginners.
4. VCs are morons. Look at their portfolios and they will expect to tell you how to run your business. They will have lots of highly educated people who have never built a successful business. VC dollars are the most expensive dollars you will ever find. You are better off not taking them... VCs set the objectives so high you'll pass up good ideas and plans for bad ones of bigger scope. VCs need to pay for their portfolios... honestly...look at those portfolios closely.
5. 9 out of 10 Start ups fail... that means you are certain to have 9 times where you probably should close your doors... If you manage to stay open through them your business will likely have adapted to the market and demand and will be the one in 10 that lives...
6. There are no rules...Its fear and greed and desire and comfort and popularity.... these are social forces no one can control or predict. Be diligent on open to adaptation. Thats the best you can do.
I started a startup about a year ago, and I have as TF Article says:
1. started with good people
2. made something customers actually want
3. spent as little money as possible
But the missing step before profit is marketing and sales, which is not easy for engineers. I'd like to see a good guide on marketing and sales for a startup since we can't afford to spend a fortune on advertising.
Open Source is Common Sense: http://groovix.com/
Who knows more good people? Someone who has had more time to meet them and see what they're like in the long haul and hard times.
Who knows what's bad in the market? People who have had to deal with the products and use then. People who have used something for 1 month know how to dumb it down for the new folks, but long term users understand all of the tasks that really need to get done using the product. They also understand the market dynamics and product pricing better.
Who knows how to handle money? If you had to give your money to someone to hold for you, would you pick the 23 year old or the 40+ year old? Like he said in the article, "If you try something that blows up and leaves you broke at 26, big deal." You know that the 40+ year old is trying harder and has more money management experience.
Dear Paul,
If you don't
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like to have
control over
how wide a
column of
text appears
in my web
browser
window.
Thanks,
Teh Intarweb
Dear Slashdot: next time you want to mess with the site, add a rich-text editor for comments.
For example, "VCs are morons" is rather sweeping. Obviously there are some staggeringly intelligent VCs out there. Perhaps you meant, "VCs are terrible investors", but that is of course also true only some of the time. Likewise "You are better off not taking their money..." etc. is hyperbolic. However:
- A lot of people jumped into the VC game starting in the late 90's who don't know what they are doing, so do your own due diligence. Many VC are former entrepreneurs/operators and can help you a lot. The best single thing you can do when choosing a VC is to ask for names and phone numbers for CEOs of ALL their investments of the last few years. Don't let the VC pick them for you; pick a few yourself and ask them what they think of the VC. Seriously...if you don't do this you're crazy.
- VCs are there to make money, not to make you rich. Hopefully those objectives will align but they don't always. For example, VCs will often negotiate for preferred stock so that if things go bad they get their money first. The entrepreneur thinks, "Hah! Even the worst case scenario in my business plan isn't THAT bad..." and signs the deal. Two years later, pain, anger, resentment, and knee-jerk posts to Slashdot. Lesson: go in with your eyes open.
- Raise money slowly. Raise just enough to get to the next milestone which gives you a much higher value, then raise just enough to get to the next milestone. This will both preserve your own equity and keep you focused. And try not to let any one investor get a controlling stake.
And, by the way, the fact that 90% (is that all?) of startups fail does not mean you are "certain" to fail the first 9 times. You may hit a home run with your first company.Actually, I was trying to be Insightful, not Funny.
In my experience, people prove to be the most critical and the most difficult part of the equation. Most people are not startup employee material. Most people, especially these days, want little responsibility, no risk, and high pay. My dad calls the high pay part an "entitlement attitude", but I couldn't tell you where the phrase originated. The risk part is understandable. The lower responsibility however, is better achieved in the same way as the low risk, by becoming another minute piece in a large enough institution that the bureaucracy adds a layer of padding between yourself and the exit ways.
;)
I definitely think it keeps things much simpler for a startup to be owned by a single person, it also creates a significant hurdle to people being dedicated to your cause. There's little for them to gain, much to risk, and the pay won't be great until you're cashflow positive somewhere down the road.
The other problematic aspect of finding the right people is that most people lack the required drive for excellence. They want crude effectiveness, and nothing more. In a smaller company, you need more perfectionists, because there is no bureaucratic padding between your work and the customer, which means that things have to be done right the first time. From my experience, excellence is getting harder and harder to find, and I believe our societal and educational structures are the cause of this condition. But that's waxing philosophical, so I'll refrain, in this post at least.
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Good luck!
I've been on both sides of the fence here. I've been employed by a startup consulting firm, and I've been part-owner of a startup software company. I've worked for nothing for months at a time, trying to get a product out the door. I've also got a partner who's been employed by a startup tech firm for the past few years.
Remember that, during those times when the company was bringing in ~$0, staff/employees were getting paid, their health insurance was getting paid, their mortgages and car leases were getting paid, their kids' school fees were getting paid, etc. The sole risk they were taking was that the company might not succeed, and they may need to go get another job.
The owners were getting nothing coming in, but were paying staff anyway. How? Either out of their pockets, or via VC/angel cash that they have had to raise by selling bits of their company. The risk the owners have taken on is much greater; the company has to actually *sell something* for them to get even $1 in their pockets. This is worth repeating; if the company never sells anything, and lots of software companies founder on that one point, then the owners have essentially funded the lifestyles of the employees for the entire period of their employment.
Next time you're commuting to work, look at the guy standing next to you and imagine what it would take to pay his salary out of your pocket for several months.
I've got no problem with giving key people equity, but you're living in a dream world if you expect the proceeds from the sale of a startup company to be split on some sort of even vaguely equal basis.
More risk = more reward
This is the second time in the last few days that I have heard the assertion that Google did "nothing brilliant".
Then why the Scientific American article about extracting meaning from the structure of the web, when these guys were at Stanford? I remember reading that article & thinking "if this really works, it'll change everything when it comes out", and it did. Google won, in a blink. It wasn't their interface.* The meaningful rankings were the only thing that got me to move to Google.
It was brilliant. They realized that in this morass of data that is the web, the structural information could be extracted & used. At the time, I'd been thinking about using cluster analysis & similar techniques from image processing to correlate pages based on content, but their technique was far more efficient & quite effective in making the web more usable. (Now, clusty.com do a cluster analysis based search.)
It seems obvious now, but it was far from it at the time. Think Google did nothing special? Try searching the web with boolean only keyword searches for awhile.
Brilliance doesn't require uniqueness. Some brilliant soul reading this comment might have thought of doing this with the web before. Since they didn't publish or execute Google gets the credit. For an overblown analogy, neither Newton nor Leibniz made the other less brilliant when each invented differential calculus.
Paul Graham should know better.
* The interface was a smart move. It was the first demonstration that they didn't have just one good idea. It was also the first obvious instance of their choosing not to be evil. They could've foisted flash or some other self-indulgent drivel on us.
Assembly is the reverse of disassembly.