Tell HN: PG's 6 Unexpected Advantages of "Cheapness" in a Startup | Hacker News Reader

Tell HN: PG's 6 Unexpected Advantages of "Cheapness" in a Startup

52 pointsdwynings45 comments

Preface: So this afternoon I had the opportunity to attend a session at TiEcon on early-stage funding, in which Paul was a panelist.

Here's his list of 6 unexpected advantages:

1. You don't have to spend a lot of time raising money.

2. You are forced to grow a culture of efficiency within your company.

3. The only way to impress somebody is to build something great.

4. You don't attract the wrong type of people (the ones who are obviously only in it for the money)

5. You can't buy things so you're forced to build them.

6. You can't afford to hire someone to do sales. You have to do it yourself, which forces you to interact with the end-user.

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There is a logic in this. The trick to understand it is to place intellectualism ahead of capitalism. It was not long ago when the Internet belonged to those who just wanted to exchange information. Kids and grown ups with no money, only their knowledge and creativity have become very successful. A lot of start-up companies started with little or no money only to become a "blue-chip" in relatively short time. A fine example is Razorfish.

In what situations is it worth to buy rather than to build?

Big, Good things. Amazon S3 and Google Maps API are the only real ones that come to mind. You couldn't do either of those better if you tried.

It's the Big, mostly good things that are the most dangerous. Off the shelf Content Management Systems come to mind as the obvious example. They'll get you close fast, then morph into a soul-draining time sink as you try to get that last 5%. You'll know early on that you're on the wrong path, but it will likely be six months of torture and waste before you actually scrap it and build your own.

Perhaps when the opportunity cost of building is greater than the actual cost of purchasing. This frequently is true when specialization or large scale production makes the producer more efficient than someone who does not have those attributes.

For example, when it's time to eat you buy prepared chicken from a store; you don't spend a few hours every day tending a small coop of chickens and bring one in every week.

A counterpoint to this is companies that are funded with a high valuation. Investors expect to see a return on their investment and don't want to hear "we left the money in the bank while we try to find and hire a person that is capable of building something we could purchase". The seed/self funded case and overcapitalized case both have "have to build" == "get to build", but in one it's 1==1 and in the other it's 0==0.

When something is not core to what you're doing. Do the core stuff yourself, buy non-core stuff. The advantage of no cash: don't buy non-core stuff, but also don't do it.

How about when you're growing but trying to avoid making extra hires beyond the founders (or still trying to find the right people) and you can buy things to save some time that you're very short of.

When buying costs significantly less than building. To us geeks its inconceivable... "I can build one better" is a common phrase, but our managers keep us in check by saying "That is great, but through distributed cost THEY can build one better and cheaper!" which is true some of the time. It is usually our job to see if in fact we can build one better and cheaper or if that product is in fact superior. Geeks and Managers keep each other in check.

I especially like #4...

Technically, #1 is possibly the only incorrect one on the list. If you don't have any money, you are quite likely to try to get some, or at least obsess and waste a lot of time worrying about money.

#6 is so important... It's one of those truths that you only understand after it happened to you once. Until it hits you, you just think "yeah, sure, I know my customers alright".

At what point does hiring make sense or when does hiring not fit being cheap? It seems that you often want to stay cheap by not hiring, but if you are behind on the tech, and need it to be further along to answer questions about your business does it make sense to hire earlier and answer those questions... or try to find other cheaper ways to get those answers with out having a fully developed product.

I actually think #1 is accurate – if you don't have any money, and you're already working on your product, then you obviously aren't burning through tons of cash just to stay operational. If developing your product is eating through cash, you have to keep spending time trying to raise more to keep going, instead of working on your product.

"If you don't have any money", then "you don't have to spend a lot of time raising money"?

Am I the only one baffled?

It was about the advantages of running a startup cheaply, not of having no money. And if you're running a startup cheaply, you don't need to raise as much.

The one big disadvantage I see is that you can quit pretty easily. Being poor gets tiring pretty quickly, especially if someone waves a nice fat salary and benefits in front of you.

This is one of the reasons the young and the nerdy tend to have an advantage in starting startups. They have inexpensive tastes. So they feel prosperous on an income that would make someone older and more conventional feel poor.

We're talking about smart people and inevitably they're going to look at friends who've opted for the corporate world and do the math. Certainly as long as the promise of a big payoff is there, then the math might weigh in favor of doing a startup. But it also might not. That whole time value of money thing says that sacrificing income in your twenties is going to hurt you a lot more in the long run than sacrificing income later on.

edit: Of course, right now the "whole time value of money" is basically negative. ;-)

Coming from a "poor" entrepreneur who has previously held six-figure software engineer salaries, I can say there's more to entrepreneurship than salary. When I busted my ass working overtime to add cool new features, nobody cared. The company doesn't care, the boss doesn't care, your coworkers don't care either. If I have to spend 1/3 of my life at work, I might as well be doing something I love, even if it puts my retirement at risk.

I mostly agree. But there's something to be said for retirement.

You can retire well even if you only make $10 an hour for 40 years. It just requires you to be very frugal with your expenses and investing wisely. Let interest do the heavy lifting for your retirement :)

The interest rates here are pretty much zero ...

The expected value of doing a startup is high -- I think a little higher than being able to guarantee myself $80K/year. If I work on a startup with 1 cofounder for 5 years and it's got a 10% chance of exiting for $10M, my expectation is roughly $100K/year. So if I can afford to take the (rather high) risk of getting nothing, then I should do the startup.

If I value my time differently depending on what I'm working on -- if the startup is lots more fun -- then it's an easy choice.

But then again you have to "spend alot of time to raise money" especially when your company hasn't proven its viability yet.

PG, on that note, what would you say is the "sweet spot" in terms of time looking to raise money?

Admittedly my mistake; I thought you had said that. Updated the original post.

If you don't have any money, then it's a foregone conclusion that nobody has a salary and you're not going to hire anybody. That drops your operating expenses down to the cost of keeping the server alive, which paradoxically means that you don't need to bring in any outside money to keep going.

The main reason we haven't taken any VC for Twiddla is that we couldn't for the life of us think of anything to spend it on. What exactly are you supposed to do with $12M when you're only burning at $600/month?

I can only assume there was context involved. Something like:

With no money, you only have two viable choices:

1. Build something to get to Ramen Profitability

2. Raise Money.

If you don't focus exclusively on one or the other, you may be making a strategic mistake.

Meh. The only ones I really agree with are 2 and 6. The other ones from a glance either don't make sense or aren't necessarily a unique benefit of a startup.

i think #1 should be #6 to make sense.

after one is forced to build, do sales and being efficient, there's little time left to raise money

It seems easy enough to agree that running a startup cheaply is good. However, seldom are people quantitative about what is cheap. Any chance we can get some numbers? What's a cheap burn-rate for a startup with 3 founders? 3 founders + 3 employees? ...?

People are quantitative when they do their business planning. In this context cheap is when cash flow is running close to break-even or better. If you have employees without revenue, it's probably not cheap. If you'll need employees for an extended period before getting significant revenue, you'll need to figure out how to convince investors to open their wallets first.

As to the disadvantages of not needing money: there's no immediate incentive to focus on making money. Which means you often spend months/years just building cool stuff that's useless.

You can only do that if you have money. Otherwise you'll die of starvation.

there is a difference between "cheapness" and "having no money." points #5 and #6 (at least as worded above) indicate having no money, which is fine, but it seems to me that the best place to be is to have money but to be cheap.

there are times when money is very helpful, the trick is to have the money but only use it when it is really needed.

having no money is just the simplest way of forcing a startup to be cheap, but that is not necessarily the best state for a startup.

The answer to "buid or buy" is more nuanced than "always build".

Yes: the answer is that building almost always turns out to have unexpected advantages.

This is silly. You did not build your own laptop or your own accounting system, operating system or your own relational database. There is a crossover point somewhere where building makes more sense than buying, but finding that point is a delicate task for each business, a lot more complex than "yeah, just build it whatever it is".

I didn't say the advantages always outweigh the disadvantages, just that there are usually more advantages that you'd expect.

I see. In that case why did you label your post as "answer" to "build or buy" question?

Because that is the more nuanced answer to "build or buy?" Of course you don't always want to build. But in borderline cases, err on the side of building, because there are often hidden advantages to building.

Are we clear now? Are you convinced I'm not advocating making your own electric power generation stations?

Yep, it's clear what you meant now.

I think this was a terminology misunderstanding - I don't see it as "the answer". "The answer" in my book is specific for each particular situation and your guideline is important to take into account for each such situation. I'm splitting hair now, but only to illustrate the source of misunderstanding.

To advance the state of the art it would help if you created a list of cases where "build" produced unexpected advantage and a list of cases where it backfired. At least it would work better for me to calibrate properly.

EDIT: It just occured to me that you answer to my answer is what curried function is to a function result. Throw in lazy evaluation and the line gets blurry. :-)

And in my experience buying often turns out to have hidden disadvantages. The biggest of which seems to me to be that whenever we've tried to buy (both off the shelf and contracted work), it always turned out to be as much trouble and effort as just taking the time to build the damn thing ourselves.

for simple things, always build is better if one is less dependent to time and money

actually, scratch that, it's even better when time and money are tight

in my case, i bought baking, washing soda and lye for my hygiene. 5kg each, each kg lasts for a year. extremely cheap (like $1/kg). only one time transaction.

i no longer go to soap, toothpaste, detergent and drano section when i go to grocery. suppose that takes 5 mins for searching, picking up, queueing and paying for each hygiene run while in grocery, it easily adds up to 52*5 = 260 mins time not wasted per year.

Nomination for bizarro post of the week :)

http://en.wikipedia.org/wiki/Beowulf_(computing) comes to mind :)

Don't forget to buld your own CPU and your own RAM chips while you're at it.

If you don't have money (or you're a cheapskate), it simplifies to 'always build'.

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