How to start a start-up
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. [1]
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. [2]
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. [3]
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. [4]
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 selffunding--
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. [5]
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 millon, because Julian
said no one would invest in a company with a valuation any lower. [6]
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. [7]
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. [8] 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. [9]
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?
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.
[3] Learning to hack is a lot cheaper than business school, because you can do it mostly on
your own. For the price of a Linux box, a copy of K&R, and a few hours of advice from your
neighbor's fifteen year old son, you'll be well on your way.
[4] Corollary: Avoid starting a startup to sell things to the biggest company of all, the
government. Yes, there are lots of opportunities to sell them technology. But let someone
else start those startups.
[5] A friend who started a company in Germany told me they do care about the paperwork
there, and that there's more of it. Which helps explain why there are not more startups in
Germany.
[6] At the seed stage our valuation was in principle $100,000, because Julian got 10% of
the company. But this is a very misleading number, because the money was the least
important of the things Julian gave us.
[7] The same goes for companies that seem to want to acquire you. There will be a few that
are only pretending to in order to pick your brains. But you can never tell for sure which
these are, so the best approach is to seem entirely open, but to fail to mention a few critical
technical secrets.
[8] I was as bad an employee as this place was a company. I apologize to anyone who had
to work with me there.
[9] You could probably write a book about how to succeed in business by doing everything
in exactly the opposite way from the DMV.
