Being rich will kill your startup

I like to the tell the story that a poor nerd can go into Fry's (electronics store) and get all the parts to build themselves a pretty decent computer, a rich nerd can go into Fry's and not buy anything. The difference is that the rich nerd could by anything, and that choice freeze them. The poor nerd has a budget and has to work within it, so they have already done the work to maximize their value given their budget. Since the rich nerd has no budget they would have to analyze every possible system they could build out of Fry's parts to have the same confidence in their buying decision as the poor nerd has, and frankly there isn't enough time for that. Stalemate.

In the startup world there is an interesting and dangerous place called the 'self funded' or 'privately funded' startup. Those places have a hard time because there is nobody to call their baby ugly and question their assumptions. If your money isn't asking you questions about your existence then you won't ask yourself those questions.

I interviewed at one such and asked how they expected to make money. "Advertising" they said, their CEO was adamant that they had a unique position with respect to their customers which would allow them to advertise more effectively to them. And I asked "So why would people who are already spending their ad budget with Google advertise with you?" and the answer was "We are bringing new people to the Internet, people who have never advertised on this scale before, we're growing the market." And that was when I thought 'Oh really?' Now you could test that theory, you could survey your users and look at their advertising budgets and you could talk to ad agencies and look to see if they were trying to find new channels. But if you did all of that, it would dispel the illusion that the advertising market was growing, its actually shrinking in terms of total dollars (yes the Internet is disruptive again).

So Markham concludes that 'rich' startups failing because they spend all of their money buying products. The counter being that a 'poor' or 'lean' startup would be forced to husband their cash more carefully and build their own tools. The effect is there, but I believe the conclusion is not. One of the things that the poor startup is being forced to do, is develop a competency in being a company. Its not a state that everyone is familiar with.

Lots of people know how to be employees, but not how to be a company. Initially, those new to startups, aren't thinking so much about how long they have to live (as a company) as how much cool stuff they can do with that fat wad of cash. Perhaps they haven't experienced the pain of trying to raise money while working 12 hr days, or had a product they depend on go bad, mid-development cycle, and scrambled to replace it. There are lots of things like that which can, and do, bite you.

It isn't rich vs poor, its disciplined cash management vs undisciplined cash management. Doesn't matter where you start from if you don't respect the cost of capital you will fail.

The majority of startups fail, period. If you analyze the people who execute successful startups, the amount of money or wealth they have is a non-negative factor -- in most cases having money helps. This is why people who are super successful with startups have many repeats.

What he seems to miss here is that some of the best businesses produce a consumable product after experiencing a problem first-hand and then deciding to go build a solution. If the narrative is clear from the beginning, then the part where "it actually starts working" will come much sooner.

Contrast with, say, "Masters of Doom" (http://en.wikipedia.org/wiki/Masters_of_Doom) where the early id software team was so pressed for cash that they would "borrow" their employer's workstations during evenings to write their code. That's what I would consider "scrappy".