Why Being Broke Is A Founder's Greatest Asset
mixergy.com
mixergy.com
If you look at many made-it-from-nothing founders of the companies we know, they rarely start out broke, are often independently wealthy (it's a lot safer to drop out of an ivy-league school with a wealthy family as a backs-stop) or have made significant money from earlier stages in their careers.
Being broke is a huge distraction to most founders, having to focus on the distractions of family, sometimes a spouse and/or kids, and struggling to pay bills - none of that is a good thing for one's ability to focus on getting your startup to any kind of critical mass.
Motivation-by-commitment, as many sales organizations will put it, is more like what's being talked about in the article - that if desperate a smart person will figure out ways to make money and often stabilize some sort of business out of that. But even that is a stretch to claim being an advantage over not being broke.
This is the kind of advice that leads mediocre founders to romanticize ramen-noodles and cheapskate their talent - either getting second tier people or trying to cajole talented engineers into taking much-below-market rate wages.
Obviously it's better for founders to be capital efficient and keep costs low. Being hungry clearly is necessary to success. But if you can get yourself to some degree of financial stability it'll make you more able to focus on what matters building your startup, and if you pay people fairly you'll attract talent and loyalty.
Remember, families didn't sign on for your start-up dream. Not being able to pay the bills is not cool. It's bad advice from people who've either never honestly been there, or folks who've forgotten what it was like there and are romanticizing it, or folks who are insecure about their success and want to build a struggle-against-adversity narrative to feed the myth of the hero-founder.
The advice is great for bootstrapped businesses who are looking to get profitable. It's probably not so great for "raising a round" venture backed "startups" who are playing the startup lottery.
If you're building a business, then being broke is a pretty great incentive to make things work.
Now I'm single again and will stay that way while I still financially struggle.
Outside of Silicon Valley, most people would not understand why you are thinking that way. Perhaps saying "Broke" is the incorrect term ... "almost broke" will light a fire under your ass.
Obviously, selling for a million dollars will work in some circumstances for some folks. But also it's worth remembering that it's not as much money as it once was. I once had a startup that for various reasons we chose to exit for right around GBP1million. It's not retiring money for someone who is (as I was) still young and has a lot of years to go. It's helpful, but not where most folks on here are aiming to be when they build a company.
I doubt most people driven to start companies need the perverse incentive of being broke to light a fire under their ass. Most founders I know are incredibly driven and motivation of that kind is seldom necessary or helpful.
No-one is saying that getting $1mm is a bad thing, just that for most start ups folks on HN are starting or working on pre-money valuations for angel rounds are higher than that... hence the starting line comment. It's the usual semantic question of what people mean by startup and founder.
However my primary point is that it's nonsense to say being broke is better than not being broke when dealing with the stresses of starting a company.
EDIT: Hm... not sure how one can be downvoted for clarifying my point in response to a comment. Meh, I guess I still don't understand the way HN works.
It may be fun for a newly-funded startup guy to count up his illiquid shares and say "I have $X now (in monopoly money)" but as you said, it's not over until your shares are actually sold, taxes are paid and indemnifications have been released.
(saw your EDIT: I don't know how downvoting works either - it wasn't me!!!)
This was the way I made it work. I wasn't about to go back home to Indiana and live with my parents again, so I hustled.
2001 was a totally different timeframe and mindset than exists now in the tech industry. It's easy to look back, 11 years later, and say "It's easy" or "Startups get valuations 10x higher than that pre-revenue" or "She could have just gone to Google and made that much money." None of that was happening in the tech bust of 2001.
These things usually have a way of working themselves out. It could have been as simple as a misplaced thumb trying to scroll on a phone.
Anyway, I wanted to say: $1.1 million is life-changing, especially when it's for a company you started at age 20 and never expected to make more than a couple hundred dollars a month on. I didn't take on any investors for that business, and I found the buyer and did the sale.
Running (and later, selling) that business solidified my expertise not only in the tech area, but also in learning how to acquire and keep customers. I wouldn't trade that experience for anything. The payday was a nice bonus.
And, I have to say, in an era where tech companies IPO and then tank, is it not refreshing to read about a bootstrapped company built by a sole founder who then sold it for 7 figures? I know I love those stories. And, even in the Valley, they're a lot rarer than you think.
I got a smallish exit a few years ago now, similar sort of range, did much worse with it. Unfortunately we took our $$ mostly in stock and that was depressing - seeing other companies selling for much more while our tech languished ignored in our acquirer as it tanked and our stock became worthless :-/
I think that your example is great, I just disagree with the premise of the article that being broke is "a founder's greatest asset".
first: congrats. I'm curious: How much of the $1.1 did you manage to keep (taxes etc.)
BTW It might be a good entry in your blog on how to set up a biz for such events.
I also did something risky that, looking back, probably wasn't the smartest idea: I financed $999,000 to the buyer at 6% interest, who then paid it back over 3 years. He did pay it all back, which was awesome, but there were definitely some heart-stopping moments in there. I gained back a lot of what I lost due to the interest payments. But I would never sell a business in that way again--it's just too risky.
Hope this helps. I do my best to be an open book. I totally agree on writing out the blog post, too. I'm running another startup now, so my time is limited, but this is still important stuff to so many entrepreneurs.
tl;dr: Enough to not have to work for 4 years, travel a lot, and to put a down payment on a house here in Austin. :)
Un-fun things startups do when broke: Digging through your belongings for spare change to buy a meal while you're working on closing a deal is not fun. Closing your 401k is not fun. Trading in your car for an ancient beater is not fun. Keeping a straight face with clients while screaming inside is not fun. Staring at an empty cupboard wondering what you're going to eat is not fun. Coding on an empty stomach is not fun. Selling your furniture is not fun.
If an important deal gets delayed (which it always does), and you're living broke (AKA ramen profitable) to keep as much as possible in your business, you may have to do all the above and more to get through lean times. Far better to avoid the distraction of fighting to survive by not being broke.
"She scrounged what hardware she could get and succeeded" does not mean that everyone who does that will succeed. I'm sure most successful businesses buy or lease or subscribe to the hardware they need.
Being a hustler and working hard is required for success. Money, or lack of it, doesn't change that. But, having access to money, even just enough to get by day-to-day, will make a hustler that much more powerful.
Sidenote: Compare the comments here on HN to the blog comments. Almost exactly the opposite, which I find strange given the supposed overlap in audience.
Having too much money is probably worse than not having enough.
I think the difference is that HN is primarily venture backed "silicon valley" startups. Mixergy is more about bootstrapped businesses.
Hunger may be a driver, but too much hunger can start to be consuming and distracting. Too much hunger and it would be tempting the next time someone offers to acquihire.
Yes it's important to take a Senecan long view and prepare yourself for the hardships you'll encounter, but to purposefully create hardship isn't a wise thing.
You should earn as much as you need, as little as you can take to give your company the best chance. But you shouldn't be broke, too hungry, and as a result distracted.
He suggests they spin out a little company to work on the disruption: one of the several reasons is that a little company can get excited by small wins.
As a tiny startup, with no money, you are already blessed with this. Ramen-profitability is a mythical dream; $1,000 incomprehensible riches; and a $5 sale - someone wants what you created! They'll actually pay, like, money, for it! - is a transcendental achievement.
Meanwhile, Google,Apple,Oracle,Microsoft notate their spreadsheets in millions. Less-than-a-million is a proverbial rounding-error, literally. They are incapable of growing something that starts that small. That's why they spend millions each year acquiring startups; until they eventually get eclipsed by one they didn't or couldn't buy.
Stay hungry.
If the point of the article is to suggest that having to eat can make you work your ass off out of fear - sure Ill agree with that one but that doesn't mean your business is going to be taking off.
Its also not that hard to understand that the more your back is off the wall the more power and freedom you have to leverage to make smart decisions. I guess if you are just a lazy person desperation may help you get to work but otherwise I cant think of any successful business person who is looking to become poorer so they can get their spark back (and if that is the case, Ill be glad to help)
To add to the anecdotal aspects of the article, I see VERY few successful founders whose starting point was being broke, at the point they were starting and establishing their company. I see a LOT of successful founders who have independent wealth - often through family. I see a LOT of successful founders who saved up enough money to give them the runway to start a company WITHOUT being broke.
If you need to be desperate and incapable of paying bills before you are motivated enough to make your startup a success, you MAY not be well suited to doing a startup.
This doesn't mean that being broke is an advantage. Quite the reverse: it happens because being broke is a disadvantage, so people who succeed despite broke-ness have to have been better in some other respects. (In some cases they might just have been luckier.)
I bet you'll find that professional basketball players who are short are especially fast, that professional academics who score worse on standard intelligence tests are more creative, that expensive houses that are in nasty areas are particularly large or beautiful, that successful singers with unimpressive voices are especially gifted musically, etc., etc., etc. None of this means that those features are advantages.
Sorry, but this is just stupid.
I've seen (and been in) startups where the founders were more focused on short term income to pay their bills than long term success in the company - and it IS definitely possible for those two things to be at odds. It wasn't a recipe for success.
I can appreciate (and believe) that being broke may add some level of motivation for some people. I don't believe that motivation is going to be distraction free in most cases, and therefore I feel the argument falls well short of being taken seriously.
As others have said, being broke, proper, is not an asset - broke people problems are not synergistic with successful company problems. So, its basically a time drain. Being perceived as less successful than you want to be.. this could be an asset if you believe the above studies.
Besides founders generally get richer as companies get bigger, especially with the advent of secondary markets where privately held shares can be sold. If you're the kind of person that loses motivation as your comfort level increases, you're unlikely to ever build a big company.
Believe me. I've been broke before. When you are broke it's not an asset and much of your time is spent thinking about how much easier everything would be if you had money.
Alternatively once you have money, from time to time you might think about how much simpler and less stressful your life was back when you had fewer responsibilities and fewer people depending on you both personally and professionally.
This article fails to take into account the dichotomy I have just described. Perhaps in a few years the author will look back at that particular post and wonder what he was thinking.
Interestingly enough, though, the body of the post doesn't really unpack that title in any meaningful way. Selling for 1.1 million dollars is meaningless compared to what well-funded companies are able to sell for (assuming they do well in the market).