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|  **Want to start a startup?** Get funded by Y Combinator.  
  
---  
  
March 2005  
  
 _(This essay is derived from a talk at the Harvard Computer Society.)_  
  
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.  
  
And that's kind of exciting, when you think about it, because all three are
doable. Hard, but doable. And since a startup that succeeds ordinarily makes
its founders rich, that implies getting rich is doable too. Hard, but doable.  
  
If there is one message I'd like to get across about startups, that's it.
There is no magically difficult step that requires brilliance to solve.  
  
**The Idea**  
  
In particular, you don't need a brilliant idea to start a startup around. The
way a startup makes money is to offer people better technology than they have
now. But what people have now is often so bad that it doesn't take brilliance
to do better.  
  
Google's plan, for example, was simply to create a search site that didn't
suck. They had three new ideas: index more of the Web, use links to rank
search results, and have clean, simple web pages with unintrusive keyword-
based ads. Above all, they were determined to make a site that was good to
use. No doubt there are great technical tricks within Google, but the overall
plan was straightforward. And while they probably have bigger ambitions now,
this alone brings them a billion dollars a year.   
  
There are plenty of other areas that are just as backward as search was before
Google. I can think of several heuristics for generating ideas for startups,
but most reduce to this: look at something people are trying to do, and figure
out how to do it in a way that doesn't suck.  
  
For example, dating sites currently suck far worse than search did before
Google. They all use the same simple-minded model. They seem to have
approached the problem by thinking about how to do database matches instead of
how dating works in the real world. An undergrad could build something better
as a class project. And yet there's a lot of money at stake. Online dating is
a valuable business now, and it might be worth a hundred times as much if it
worked.  
  
An idea for a startup, however, is only a beginning. A lot of would-be startup
founders think the key to the whole process is the initial idea, and from that
point all you have to do is execute. Venture capitalists know better. If you
go to VC firms with a brilliant idea that you'll tell them about if they sign
a nondisclosure agreement, most will tell you to get lost. That shows how much
a mere idea is worth. The market price is less than the inconvenience of
signing an NDA.  
  
Another sign of how little the initial idea is worth is the number of startups
that change their plan en route. Microsoft's original plan was to make money
selling programming languages, of all things. Their current business model
didn't occur to them until IBM dropped it in their lap five years later.  
  
Ideas for startups are worth something, certainly, but the trouble is, they're
not transferrable. They're not something you could hand to someone else to
execute. Their value is mainly as starting points: as questions for the people
who had them to continue thinking about.  
  
What matters is not ideas, but the people who have them. Good people can fix
bad ideas, but good ideas can't save bad people.  
  
**People**  
  
What do I mean by good people? One of the best tricks I learned during our
startup was a rule for deciding who to hire. Could you describe the person as
an animal? It might be hard to translate that into another language, but I
think everyone in the US knows what it means. It means someone who takes their
work a little too seriously; someone who does what they do so well that they
pass right through professional and cross over into obsessive.  
  
What it means specifically depends on the job: a salesperson who just won't
take no for an answer; a hacker who will stay up till 4:00 AM rather than go
to bed leaving code with a bug in it; a PR person who will cold-call _New York
Times_ reporters on their cell phones; a graphic designer who feels physical
pain when something is two millimeters out of place.  
  
Almost everyone who worked for us was an animal at what they did. The woman in
charge of sales was so tenacious that I used to feel sorry for potential
customers on the phone with her. You could sense them squirming on the hook,
but you knew there would be no rest for them till they'd signed up.  
  
If you think about people you know, you'll find the animal test is easy to
apply. Call the person's image to mind and imagine the sentence "so-and-so is
an animal." If you laugh, they're not. You don't need or perhaps even want
this quality in big companies, but you need it in a startup.  
  
For programmers we had three additional tests. Was the person genuinely smart?
If so, could they actually get things done? And finally, since a few good
hackers have unbearable personalities, could we stand to have them around?  
  
That last test filters out surprisingly few people. We could bear any amount
of nerdiness if someone was truly smart. What we couldn't stand were people
with a lot of attitude. But most of those weren't truly smart, so our third
test was largely a restatement of the first.  
  
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 technique doesn't always work, because people can be influenced by their
environment. In the MIT CS department, there seems to be a tradition of acting
like a brusque know-it-all. I'm told it derives ultimately from Marvin Minsky,
in the same way the classic airline pilot manner is said to derive from Chuck
Yeager. Even genuinely smart people start to act this way there, so you have
to make allowances.  
  
It helped us to have Robert Morris, who is one of the readiest to say "I don't
know" of anyone I've met. (At least, he was before he became a professor at
MIT.) No one dared put on attitude around Robert, because he was obviously
smarter than they were and yet had zero attitude himself.  
  
Like most startups, ours began with a group of friends, and it was through
personal contacts that we got most of the people we hired. This is a crucial
difference between startups and big companies. Being friends with someone for
even a couple days will tell you more than companies could ever learn in
interviews.   
  
It's no coincidence that startups start around universities, because that's
where smart people meet. It's not what people learn in classes at MIT and
Stanford that has made technology companies spring up around them. They could
sing campfire songs in the classes so long as admissions worked the same.  
  
If you start a startup, there's a good chance it will be with people you know
from college or grad school. So in theory you ought to try to make friends
with as many smart people as you can in school, right? Well, no. Don't make a
conscious effort to schmooze; that doesn't work well with hackers.  
  
What you should do in college is work on your own projects. Hackers should do
this even if they don't plan to start startups, because it's the only real way
to learn how to program. In some cases you may collaborate with other
students, and this is the best way to get to know good hackers. The project
may even grow into a startup. But once again, I wouldn't aim too directly at
either target. Don't force things; just work on stuff you like with people you
like.  
  
Ideally you want between two and four founders. It would be hard to start with
just one. One person would find the moral weight of starting a company hard to
bear. Even Bill Gates, who seems to be able to bear a good deal of moral
weight, had to have a co-founder. But you don't want so many founders that the
company starts to look like a group photo. Partly because you don't need a lot
of people at first, but mainly because the more founders you have, the worse
disagreements you'll have. When there are just two or three founders, you know
you have to resolve disputes immediately or perish. If there are seven or
eight, disagreements can linger and harden into factions. You don't want mere
voting; you need unanimity.  
  
In a technology startup, which most startups are, the founders should include
technical people. During the Internet Bubble there were a number of startups
founded by business people who then went looking for hackers to create their
product for them. This doesn't work well. Business people are bad at deciding
what to do with technology, because they don't know what the options are, or
which kinds of problems are hard and which are easy. And when business people
try to hire hackers, they can't tell which ones are good. Even other hackers
have a hard time doing that. For business people it's roulette.  
  
Do the founders of a startup have to include business people? That depends. We
thought so when we started ours, and we asked several people who were said to
know about this mysterious thing called "business" if they would be the
president. But they all said no, so I had to do it myself. And what I
discovered was that business was no great mystery. It's not something like
physics or medicine that requires extensive study. You just try to get people
to pay you for stuff.  
  
I think the reason I made such a mystery of business was that I was disgusted
by the idea of doing it. I wanted to work in the pure, intellectual world of
software, not deal with customers' mundane problems. People who don't want to
get dragged into some kind of work often develop a protective incompetence at
it. Paul Erdos was particularly good at this. By seeming unable even to cut a
grapefruit in half (let alone go to the store and buy one), he forced other
people to do such things for him, leaving all his time free for math. Erdos
was an extreme case, but most husbands use the same trick to some degree.  
  
Once I was forced to discard my protective incompetence, I found that business
was neither so hard nor so boring as I feared. There are esoteric areas of
business that are quite hard, like tax law or the pricing of derivatives, but
you don't need to know about those in a startup. All you need to know about
business to run a startup are commonsense things people knew before there were
business schools, or even universities.  
  
If you work your way down the Forbes 400 making an x next to the name of each
person with an MBA, you'll learn something important about business school.
After Warren Buffett, you don't hit another MBA till number 22, Phil Knight,
the CEO of Nike. There are only 5 MBAs in the top 50\. What you notice in the
Forbes 400 are a lot of people with technical backgrounds. Bill Gates, Steve
Jobs, Larry Ellison, Michael Dell, Jeff Bezos, Gordon Moore. The rulers of the
technology business tend to come from technology, not business. So if you want
to invest two years in something that will help you succeed in business, the
evidence suggests you'd do better to learn how to hack than get an MBA.   
  
There is one reason you might want to include business people in a startup,
though: because you have to have at least one person willing and able to focus
on what customers want. Some believe only business people can do this-- that
hackers can implement software, but not design it. That's nonsense. There's
nothing about knowing how to program that prevents hackers from understanding
users, or about not knowing how to program that magically enables business
people to understand them.  
  
If you can't understand users, however, you should either learn how or find a
co-founder who can. That is the single most important issue for technology
startups, and the rock that sinks more of them than anything else.  
  
**What Customers Want**  
  
It's not just startups that have to worry about this. I think most businesses
that fail do it because they don't give customers what they want. Look at
restaurants. A large percentage fail, about a quarter in the first year. But
can you think of one restaurant that had really good food and went out of
business?  
  
Restaurants with great food seem to prosper no matter what. A restaurant with
great food can be expensive, crowded, noisy, dingy, out of the way, and even
have bad service, and people will keep coming. It's true that a restaurant
with mediocre food can sometimes attract customers through gimmicks. But that
approach is very risky. It's more straightforward just to make the food good.  
  
It's the same with technology. You hear all kinds of reasons why startups
fail. But can you think of one that had a massively popular product and still
failed?  
  
In nearly every failed startup, the real problem was that customers didn't
want the product. For most, the cause of death is listed as "ran out of
funding," but that's only the immediate cause. Why couldn't they get more
funding? Probably because the product was a dog, or never seemed likely to be
done, or both.  
  
When I was trying to think of the things every startup needed to do, I almost
included a fourth: get a version 1 out as soon as you can. But I decided not
to, because that's implicit in making something customers want. The only way
to make something customers want is to get a prototype in front of them and
refine it based on their reactions.  
  
The other approach is what I call the "Hail Mary" strategy. You make elaborate
plans for a product, hire a team of engineers to develop it (people who do
this tend to use the term "engineer" for hackers), and then find after a year
that you've spent two million dollars to develop something no one wants. This
was not uncommon during the Bubble, especially in companies run by business
types, who thought of software development as something terrifying that
therefore had to be carefully planned.  
  
We never even considered that approach. As a Lisp hacker, I come from the
tradition of rapid prototyping. I would not claim (at least, not here) that
this is the right way to write every program, but it's certainly the right way
to write software for a startup. In a startup, your initial plans are almost
certain to be wrong in some way, and your first priority should be to figure
out where. The only way to do that is to try implementing them.  
  
Like most startups, we changed our plan on the fly. At first we expected our
customers to be Web consultants. But it turned out they didn't like us,
because our software was easy to use and we hosted the site. It would be too
easy for clients to fire them. We also thought we'd be able to sign up a lot
of catalog companies, because selling online was a natural extension of their
existing business. But in 1996 that was a hard sell. The middle managers we
talked to at catalog companies saw the Web not as an opportunity, but as
something that meant more work for them.  
  
We did get a few of the more adventurous catalog companies. Among them was
Frederick's of Hollywood, which gave us valuable experience dealing with heavy
loads on our servers. But most of our users were small, individual merchants
who saw the Web as an opportunity to build a business. Some had retail stores,
but many only existed online. And so we changed direction to focus on these
users. Instead of concentrating on the features Web consultants and catalog
companies would want, we worked to make the software easy to use.  
  
I learned something valuable from that. It's worth trying very, very hard to
make technology easy to use. Hackers are so used to computers that they have
no idea how horrifying software seems to normal people. Stephen Hawking's
editor told him that every equation he included in his book would cut sales in
half. When you work on making technology easier to use, you're riding that
curve up instead of down. A 10% improvement in ease of use doesn't just
increase your sales 10%. It's more likely to double your sales.  
  
How do you figure out what customers want? Watch them. One of the best places
to do this was at trade shows. Trade shows didn't pay as a way of getting new
customers, but they were worth it as market research. We didn't just give
canned presentations at trade shows. We used to show people how to build real,
working stores. Which meant we got to watch as they used our software, and
talk to them about what they needed.  
  
No matter what kind of startup you start, it will probably be a stretch for
you, the founders, to understand what users want. The only kind of software
you can build without studying users is the sort for which you are the typical
user. But this is just the kind that tends to be open source: operating
systems, programming languages, editors, and so on. So if you're developing
technology for money, you're probably not going to be developing it for people
like you. Indeed, you can use this as a way to generate ideas for startups:
what do people who are not like you want from technology?  
  
When most people think of startups, they think of companies like Apple or
Google. Everyone knows these, because they're big consumer brands. But for
every startup like that, there are twenty more that operate in niche markets
or live quietly down in the infrastructure. So if you start a successful
startup, odds are you'll start one of those.  
  
Another way to say that is, if you try to start the kind of startup that has
to be a big consumer brand, the odds against succeeding are steeper. The best
odds are in niche markets. Since startups make money by offering people
something better than they had before, the best opportunities are where things
suck most. And it would be hard to find a place where things suck more than in
corporate IT departments. You would not believe the amount of money companies
spend on software, and the crap they get in return. This imbalance equals
opportunity.  
  
If you want ideas for startups, one of the most valuable things you could do
is find a middle-sized non-technology company and spend a couple weeks just
watching what they do with computers. Most good hackers have no more idea of
the horrors perpetrated in these places than rich Americans do of what goes on
in Brazilian slums.  
  
Start by writing software for smaller companies, because it's easier to sell
to them. It's worth so much to sell stuff to big companies that the people
selling them the crap they currently use spend a lot of time and money to do
it. And while you can outhack Oracle with one frontal lobe tied behind your
back, you can't outsell an Oracle salesman. So if you want to win through
better technology, aim at smaller customers.   
  
They're the more strategically valuable part of the market anyway. In
technology, the low end always eats the high end. It's easier to make an
inexpensive product more powerful than to make a powerful product cheaper. So
the products that start as cheap, simple options tend to gradually grow more
powerful till, like water rising in a room, they squash the "high-end"
products against the ceiling. Sun did this to mainframes, and Intel is doing
it to Sun. Microsoft Word did it to desktop publishing software like Interleaf
and Framemaker. Mass-market digital cameras are doing it to the expensive
models made for professionals. Avid did it to the manufacturers of specialized
video editing systems, and now Apple is doing it to Avid. _Henry Ford_ did it
to the car makers that preceded him. If you build the simple, inexpensive
option, you'll not only find it easier to sell at first, but you'll also be in
the best position to conquer the rest of the market.  
  
It's very dangerous to let anyone fly under you. If you have the cheapest,
easiest product, you'll own the low end. And if you don't, you're in the
crosshairs of whoever does.  
  
**Raising Money**  
  
To make all this happen, you're going to need money. Some startups have been
self-funding-- Microsoft for example-- but most aren't. I think it's wise to
take money from investors. To be self-funding, you have to start as a
consulting company, and it's hard to switch from that to a product company.  
  
Financially, a startup is like a pass/fail course. The way to get rich from a
startup is to maximize the company's chances of succeeding, not to maximize
the amount of stock you retain. So if you can trade stock for something that
improves your odds, it's probably a smart move.  
  
To most hackers, getting investors seems like a terrifying and mysterious
process. Actually it's merely tedious. I'll try to give an outline of how it
works.  
  
The first thing you'll need is a few tens of thousands of dollars to pay your
expenses while you develop a prototype. This is called seed capital. Because
so little money is involved, raising seed capital is comparatively easy-- at
least in the sense of getting a quick yes or no.  
  
Usually you get seed money from individual rich people called "angels." Often
they're people who themselves got rich from technology. At the seed stage,
investors don't expect you to have an elaborate business plan. Most know that
they're supposed to decide quickly. It's not unusual to get a check within a
week based on a half-page agreement.  
  
We started Viaweb with $10,000 of seed money from our friend Julian. But he
gave us a lot more than money. He's a former CEO and also a corporate lawyer,
so he gave us a lot of valuable advice about business, and also did all the
legal work of getting us set up as a company. Plus he introduced us to one of
the two angel investors who supplied our next round of funding.  
  
Some angels, especially those with technology backgrounds, may be satisfied
with a demo and a verbal description of what you plan to do. But many will
want a copy of your business plan, if only to remind themselves what they
invested in.  
  
Our angels asked for one, and looking back, I'm amazed how much worry it
caused me. "Business plan" has that word "business" in it, so I figured it had
to be something I'd have to read a book about business plans to write. Well,
it doesn't. At this stage, all most investors expect is a brief description of
what you plan to do and how you're going to make money from it, and the
resumes of the founders. If you just sit down and write out what you've been
saying to one another, that should be fine. It shouldn't take more than a
couple hours, and you'll probably find that writing it all down gives you more
ideas about what to do.  
  
For the angel to have someone to make the check out to, you're going to have
to have some kind of company. Merely incorporating yourselves isn't hard. The
problem is, for the company to exist, you have to decide who the founders are,
and how much stock they each have. If there are two founders with the same
qualifications who are both equally committed to the business, that's easy.
But if you have a number of people who are expected to contribute in varying
degrees, arranging the proportions of stock can be hard. And once you've done
it, it tends to be set in stone.  
  
I have no tricks for dealing with this problem. All I can say is, try hard to
do it right. I do have a rule of thumb for recognizing when you have, though.
When everyone feels they're getting a slightly bad deal, that they're doing
more than they should for the amount of stock they have, the stock is
optimally apportioned.  
  
There is more to setting up a company than incorporating it, of course:
insurance, business license, unemployment compensation, various things with
the IRS. I'm not even sure what the list is, because we, ah, skipped all that.
When we got real funding near the end of 1996, we hired a great CFO, who fixed
everything retroactively. It turns out that no one comes and arrests you if
you don't do everything you're supposed to when starting a company. And a good
thing too, or a lot of startups would never get started.   
  
It can be dangerous to delay turning yourself into a company, because one or
more of the founders might decide to split off and start another company doing
the same thing. This does happen. So when you set up the company, as well as
as apportioning the stock, you should get all the founders to sign something
agreeing that everyone's ideas belong to this company, and that this company
is going to be everyone's only job.  
  
[If this were a movie, ominous music would begin here.]  
  
While you're at it, you should ask what else they've signed. One of the worst
things that can happen to a startup is to run into intellectual property
problems. We did, and it came closer to killing us than any competitor ever
did.  
  
As we were in the middle of getting bought, we discovered that one of our
people had, early on, been bound by an agreement that said all his ideas
belonged to the giant company that was paying for him to go to grad school. In
theory, that could have meant someone else owned big chunks of our software.
So the acquisition came to a screeching halt while we tried to sort this out.
The problem was, since we'd been about to be acquired, we'd allowed ourselves
to run low on cash. Now we needed to raise more to keep going. But it's hard
to raise money with an IP cloud over your head, because investors can't judge
how serious it is.  
  
Our existing investors, knowing that we needed money and had nowhere else to
get it, at this point attempted certain gambits which I will not describe in
detail, except to remind readers that the word "angel" is a metaphor. The
founders thereupon proposed to walk away from the company, after giving the
investors a brief tutorial on how to administer the servers themselves. And
while this was happening, the acquirers used the delay as an excuse to welch
on the deal.  
  
Miraculously it all turned out ok. The investors backed down; we did another
round of funding at a reasonable valuation; the giant company finally gave us
a piece of paper saying they didn't own our software; and six months later we
were bought by Yahoo for much more than the earlier acquirer had agreed to
pay. So we were happy in the end, though the experience probably took several
years off my life.  
  
Don't do what we did. Before you consummate a startup, ask everyone about
their previous IP history.  
  
Once you've got a company set up, it may seem presumptuous to go knocking on
the doors of rich people and asking them to invest tens of thousands of
dollars in something that is really just a bunch of guys with some ideas. But
when you look at it from the rich people's point of view, the picture is more
encouraging. Most rich people are looking for good investments. If you really
think you have a chance of succeeding, you're doing them a favor by letting
them invest. Mixed with any annoyance they might feel about being approached
will be the thought: are these guys the next Google?  
  
Usually angels are financially equivalent to founders. They get the same kind
of stock and get diluted the same amount in future rounds. How much stock
should they get? That depends on how ambitious you feel. When you offer x
percent of your company for y dollars, you're implicitly claiming a certain
value for the whole company. Venture investments are usually described in
terms of that number. If you give an investor new shares equal to 5% of those
already outstanding in return for $100,000, then you've done the deal at a
pre-money valuation of $2 million.  
  
How do you decide what the value of the company should be? There is no
rational way. At this stage the company is just a bet. I didn't realize that
when we were raising money. Julian thought we ought to value the company at
several million dollars. I thought it was preposterous to claim that a couple
thousand lines of code, which was all we had at the time, were worth several
million dollars. Eventually we settled on one million, because Julian said no
one would invest in a company with a valuation any lower.   
  
What I didn't grasp at the time was that the valuation wasn't just the value
of the code we'd written so far. It was also the value of our ideas, which
turned out to be right, and of all the future work we'd do, which turned out
to be a lot.  
  
The next round of funding is the one in which you might deal with actual
venture capital firms. But don't wait till you've burned through your last
round of funding to start approaching them. VCs are slow to make up their
minds. They can take months. You don't want to be running out of money while
you're trying to negotiate with them.  
  
Getting money from an actual VC firm is a bigger deal than getting money from
angels. The amounts of money involved are larger, millions usually. So the
deals take longer, dilute you more, and impose more onerous conditions.  
  
Sometimes the VCs want to install a new CEO of their own choosing. Usually the
claim is that you need someone mature and experienced, with a business
background. Maybe in some cases this is true. And yet Bill Gates was young and
inexperienced and had no business background, and he seems to have done ok.
Steve Jobs got booted out of his own company by someone mature and
experienced, with a business background, who then proceeded to ruin the
company. So I think people who are mature and experienced, with a business
background, may be overrated. We used to call these guys "newscasters,"
because they had neat hair and spoke in deep, confident voices, and generally
didn't know much more than they read on the teleprompter.  
  
We talked to a number of VCs, but eventually we ended up financing our startup
entirely with angel money. The main reason was that we feared a brand-name VC
firm would stick us with a newscaster as part of the deal. That might have
been ok if he was content to limit himself to talking to the press, but what
if he wanted to have a say in running the company? That would have led to
disaster, because our software was so complex. We were a company whose whole
m.o. was to win through better technology. The strategic decisions were mostly
decisions about technology, and we didn't need any help with those.  
  
This was also one reason we didn't go public. Back in 1998 our CFO tried to
talk me into it. In those days you could go public as a dogfood portal, so as
a company with a real product and real revenues, we might have done well. But
I feared it would have meant taking on a newscaster-- someone who, as they
say, "can talk Wall Street's language."  
  
I'm happy to see Google is bucking that trend. They didn't talk Wall Street's
language when they did their IPO, and Wall Street didn't buy. And now Wall
Street is collectively kicking itself. They'll pay attention next time. Wall
Street learns new languages fast when money is involved.  
  
You have more leverage negotiating with VCs than you realize. The reason is
other VCs. I know a number of VCs now, and when you talk to them you realize
that it's a seller's market. Even now there is too much money chasing too few
good deals.  
  
VCs form a pyramid. At the top are famous ones like Sequoia and Kleiner
Perkins, but beneath those are a huge number you've never heard of. What they
all have in common is that a dollar from them is worth one dollar. Most VCs
will tell you that they don't just provide money, but connections and advice.
If you're talking to Vinod Khosla or John Doerr or Mike Moritz, this is true.
But such advice and connections can come very expensive. And as you go down
the food chain the VCs get rapidly  dumber. A few steps down from the top
you're basically talking to bankers who've picked up a few new vocabulary
words from reading _Wired_. (Does your product use _XML?_) So I'd advise you
to be skeptical about claims of experience and connections. Basically, a VC is
a source of money. I'd be inclined to go with whoever offered the most money
the soonest with the least strings attached.  
  
You may wonder how much to tell VCs. And you should, because some of them may
one day be funding your competitors. I think the best plan is not to be
overtly secretive, but not to tell them everything either. After all, as most
VCs say, they're more interested in the people than the ideas. The main reason
they want to talk about your idea is to judge you, not the idea. So as long as
you seem like you know what you're doing, you can probably keep a few things
back from them.   
  
Talk to as many VCs as you can, even if you don't want their money, because a)
they may be on the board of someone who will buy you, and b) if you seem
impressive, they'll be discouraged from investing in your competitors. The
most efficient way to reach VCs, especially if you only want them to know
about you and don't want their money, is at the conferences that are
occasionally organized for startups to present to them.  
  
**Not Spending It**  
  
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.  
  
**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.  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.   
  
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?  
  
  
  
  
  
  
  
**