Why to Start a Startup in a Bad Economy(paulgraham.com)
paulgraham.com
Why to Start a Startup in a Bad Economy
http://www.paulgraham.com/badeconomy.html
203 comments
MS and Apple happened to come along when the microcomputer was really starting to take off, and they were able to ride that wave
That was the point I was making with those examples: that technology evolves independently of the stock market. So if it's time to build the Apple I or Altair Basic, do it whether the economy is good or bad.
That was the point I was making with those examples: that technology evolves independently of the stock market. So if it's time to build the Apple I or Altair Basic, do it whether the economy is good or bad.
After reading the Woz interview in Founders, it's obvious that he wasn't paying much attention to the stock market. He was too busy doing what he loved. Their initial business approach (cash for product) may have been produced by their times, but they didn't let that stand in the way.
And that's the lesson for me. All I can control is my immediate situation. The other stuff is just noise best drowned out by hard work at things I enjoy.
And that's the lesson for me. All I can control is my immediate situation. The other stuff is just noise best drowned out by hard work at things I enjoy.
Technology doesn't evolve independently of a market for it. While "make something people want" is true in any economy, the problem is that what people want changes with the state of the economy. So startup founders need to reassess the market for their products (building iPods or building pacemakers?), and I'd guess many will decide this is not the right economy for their startups, and some will now discover new opportunities.
You do touch upon this a little bit in your article, where you mention startups that save customers money will succeed more in a bad economy. But I thought the more general assertion wasn't made.
You do touch upon this a little bit in your article, where you mention startups that save customers money will succeed more in a bad economy. But I thought the more general assertion wasn't made.
I've often thought that the mantra make something people want should be amended to make something people want to pay for. It's an important distinction. It's the difference between Richard Stallman and Steve Jobs, between Linus Torvalds and Bill Gates. I have great respect for all of those individuals, but I don't look to Stallman or Torvalds for business inspiration. I don't doubt that all YC companies have made something people want, but I wonder whether all have made something people want to pay for.
Neither Stallman nor Torvalds are scrambling to pay rent.
So it depends if you want to be "well off" (Stallman), "obscenely rich" (Torvalds), "shockingly rich" (Jobs), or "embarassingly rich" (Gates).
And I think that most would, given the choice, rather be the BDFL of a project they obviously enjoy (Torvalds), than spend all day in meetings, or managing management, or whatever Gates has done for the last decade. Unless you're a masochist, or a megalomaniac.
And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
"I'm trying to make a living; if you're trying to make a killing then you're stuck in the system."
So it depends if you want to be "well off" (Stallman), "obscenely rich" (Torvalds), "shockingly rich" (Jobs), or "embarassingly rich" (Gates).
And I think that most would, given the choice, rather be the BDFL of a project they obviously enjoy (Torvalds), than spend all day in meetings, or managing management, or whatever Gates has done for the last decade. Unless you're a masochist, or a megalomaniac.
And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
"I'm trying to make a living; if you're trying to make a killing then you're stuck in the system."
>Neither Stallman nor Torvalds are scrambling to pay rent.
I've heard rumors that Torvalds wishes he had the money Jobs and Gates have. So, yeah, a little unhappy.
>And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
That's if you're in a bell-curve. If you're in a zipf-distribution, lightning only has to strike once.
I've heard rumors that Torvalds wishes he had the money Jobs and Gates have. So, yeah, a little unhappy.
>And besides that, lightning has to strike the same place 200 times before you make it to the 99.9th percentile.
That's if you're in a bell-curve. If you're in a zipf-distribution, lightning only has to strike once.
If you can make something that people want, but don't want to pay for, then you can probably make money indirectly from it: by selling t-shirts, giving after-dinner speeches, or whatever.
one of the problems with web-apps is that while they are cheap to get going ... many traditional VCs look elsewhere for their next investments.
It's not a bug, it's a feature.
It's not a bug, it's a feature.
yep, that's not a problem with web-apps, that's a problem with traditional VCs...
I wonder if a cooler external economy might actually give a startup more time to stabilize its platform, find its market, etc. etc. before exiting. This might actually produce better startups, on average.
(Here, "better" = chance of becoming profitable, and relevant to the web, for the long term; "better" != chance of cashing out for megabucks within a year or two; i.e. "better" for me as a web user.)
(Here, "better" = chance of becoming profitable, and relevant to the web, for the long term; "better" != chance of cashing out for megabucks within a year or two; i.e. "better" for me as a web user.)
Or for buyers?
MS and Apple happened to come along when the microcomputer was really starting to take off
There are very good waves to ride right now. For example: Cloud computing, IPv6, Energy Saving, and moving everything out there to AJAX.
All of those will obsolete other technologies and most will save money.
There are very good waves to ride right now. For example: Cloud computing, IPv6, Energy Saving, and moving everything out there to AJAX.
All of those will obsolete other technologies and most will save money.
Indeed, there are a ton of web-apps that probably will never take off. Still, there is the big advantage that you can build a prototype almost for free.
Other fields (solar, biotech, whatever) might require way more money to start. For real stuff, like machines, not for swag and parties.
Having nothing than an idea, how do you convince a VC that you need a ton of money, given the current economic situation?
Other fields (solar, biotech, whatever) might require way more money to start. For real stuff, like machines, not for swag and parties.
Having nothing than an idea, how do you convince a VC that you need a ton of money, given the current economic situation?
Still, there is the big advantage that you can build a prototype almost for free.
As we build, this point still amazes me. If you're willing to put in the time and effort, the cost is not prohibitive. Build in spite of the VCs, not because of them. If your product is good enough, users will force them to find a path to your door. And, of course, you still have a day and a half:
http://ycombinator.com/w2009.html
As we build, this point still amazes me. If you're willing to put in the time and effort, the cost is not prohibitive. Build in spite of the VCs, not because of them. If your product is good enough, users will force them to find a path to your door. And, of course, you still have a day and a half:
http://ycombinator.com/w2009.html
> I would look to solar and certain other viable alternative energy options right now as the next major tech growth sector.
Right. The next wave is further electrification, new power generation, and first world infrastructure renewal. New advanced rail and massive rail line build outs. Rebuilding sewage and water systems. Alternative energy. Revamping agriculture for expensive oil and scarce fresh water will also be a big hi-tech area.
I'm sure the garage hackers will make money here and there as part of the wave, but they will be auxiliary; not like with the PC or internet booms. The main stage will be the capital intensive stuff working with actual raw materials.
Right. The next wave is further electrification, new power generation, and first world infrastructure renewal. New advanced rail and massive rail line build outs. Rebuilding sewage and water systems. Alternative energy. Revamping agriculture for expensive oil and scarce fresh water will also be a big hi-tech area.
I'm sure the garage hackers will make money here and there as part of the wave, but they will be auxiliary; not like with the PC or internet booms. The main stage will be the capital intensive stuff working with actual raw materials.
Why stop there? I think the next wave is that the world will revert to a mainly agricultural economy. I'm sure artisans will make money here and there (repairing plows and so on) but they will be auxiliary...
A modern vegetable farm or hothouse operation is eight times as hi-tech as your ruby on rails site. A maglev train and its infrastructure eight times again.
You should become a limited partner at Kleiner; they share many of your thoughts.
This article seems to ignore the main argument I've heard: exit strategies are fewer in a recession. IPOs are out of the question and few companies are in an acquisition mood. So instead of growing fast and selling out before you hit your plateau, you have keep your traffic climbing until the market picks back up. That's really hard, esp. since founders have a tendency to get bored. I expect many will start something new at that point anyway, so I can see why it'd be tempting to skip the step in between. (That said, it's hard to think of a better way to spend the time -- even a failed startup's more educational than grad school.)
While exit strategies might be fewer during a recession, the point of starting now is that the economy will (hopefully) be out of the recession by the time you want to exit (typically beyond 12-18 months).
Yes. Startups generally take 3-5 years to succeed. The economic situation that far ahead is effectively random, so you can discount it.
Just curious, how do you define succeed? Founders becoming millionaires or?
Agreed. With some exceptions, startups are more like marathons than sprints. Investors often look for an exit in ~5 years, while too many founders think that they'll be out, as a success or failure, in 18 months.
Good point, but there IS a delay. Some companies have a 6 month triumph like Omnisio, but most follow a multi-year path to liquidity. Maybe not the 5-7 that is tradition for VCs, but at least a few years.
So starting up now, founders should ask themselves-- what's liquidity look like in 3-5+ years? The correct answer is, "I have no clue"-- but if you start now, you'll probably have a better shot at liquidity in 3-5 years because all of the other hackers went to grad school. ;-)
So starting up now, founders should ask themselves-- what's liquidity look like in 3-5+ years? The correct answer is, "I have no clue"-- but if you start now, you'll probably have a better shot at liquidity in 3-5 years because all of the other hackers went to grad school. ;-)
People starting companies now can choose ideas that lead to profitability rather than "exits" (IPOs and acquisitions). Ideas along the lines of what 37signals does. As long as they do that, one can argue that startups are not any less feasible now than they were last year, as follows. PG's essay of a few years ago on why you should take VC gave as one big reason, Well, you competitors are probably going to take VC (which allows them to progress faster than you can if you do not take VC). The credit crunch makes it harder for you to get VC, but it makes it harder for your competitors, too. Now, what would people do who decide not to found companies? Well, become employees. But the employment market really does get a whole lot more competitive during a big economic downturn, whereas if the analysis I just gave is right, the start-up sector does not (at least the part of the sector in which success is not dependent on an IPO or acquisition does not).
There is a hidden assumption in the above: it assumes that a startup's competitors are other startups, not established firms. Established firms have easier access to credit than startups. (They can fund new lines of business out of profits from existing lines of business, for example, which is a form of "access to credit" for the sake of this discussion, which is about starting new lines of business -- i.e., exploiting new markets.) This is a real disadvantage of startups relative to established firms, and the disadvantage gets bigger because of the economic downturn, but the disadvantage of being an employee of an established firm when lots of job hunters are in the market might get even bigger.
There are ways in which startups have been able to neutralize the funding advantage held by established firms. One big way is to be more agile. "Agility" means adopting new technologies and entering new market more quickly. Changes in technology and changes in markets and potential markets continue to occur during economic downturns.
There is a hidden assumption in the above: it assumes that a startup's competitors are other startups, not established firms. Established firms have easier access to credit than startups. (They can fund new lines of business out of profits from existing lines of business, for example, which is a form of "access to credit" for the sake of this discussion, which is about starting new lines of business -- i.e., exploiting new markets.) This is a real disadvantage of startups relative to established firms, and the disadvantage gets bigger because of the economic downturn, but the disadvantage of being an employee of an established firm when lots of job hunters are in the market might get even bigger.
There are ways in which startups have been able to neutralize the funding advantage held by established firms. One big way is to be more agile. "Agility" means adopting new technologies and entering new market more quickly. Changes in technology and changes in markets and potential markets continue to occur during economic downturns.
You don't need exit strategies. Issue dividends.
Existing startups will probably have a hard time trying to decrease the burn rate and at the same time growing traffic.
On the contrary, potential startup founders will have more reasons to think of their projects as businesses - trying to grow revenues, not traffic. And to get revenue, you have to solve real problems.
On the contrary, potential startup founders will have more reasons to think of their projects as businesses - trying to grow revenues, not traffic. And to get revenue, you have to solve real problems.
Right, you have to build something people want - not something companies want. Solve the first and the second will always take care of itself.
EDIT: Just to be clear: That doesn't rule out enterprise applications. People in companies have needs too!
EDIT: Just to be clear: That doesn't rule out enterprise applications. People in companies have needs too!
Another great essay Paul, I wrote up a blog post with similar conclusions last week: http://www.charlesju.com/2008/10/5-ways-recessions-help-star...
Sorry for the plug, I just thought it was funny that we're on the same side of the equation, when everyone else in the world isn't.
It seems to me that somewhere along the evolution of the internet we forgot the golden rule of any business:
If you make stuff people want, they'll pay for it (either directly or indirectly), and you'll make money. Recession or not.
Sorry for the plug, I just thought it was funny that we're on the same side of the equation, when everyone else in the world isn't.
It seems to me that somewhere along the evolution of the internet we forgot the golden rule of any business:
If you make stuff people want, they'll pay for it (either directly or indirectly), and you'll make money. Recession or not.
Totally unrelated:
Clicked through to Bountii, and then onto their API TOS, and found this:
"[you agree not to] use the Bountii API to operate nuclear facilities, life support, or other mission critical application where human life or property may be at stake. You understand that the Bountii API is not designed for such purposes and that their failure in such cases could lead to death, personal injury, or severe property or environmental damage for which Bountii is not responsible;"
Me he heeeeeee
Clicked through to Bountii, and then onto their API TOS, and found this:
"[you agree not to] use the Bountii API to operate nuclear facilities, life support, or other mission critical application where human life or property may be at stake. You understand that the Bountii API is not designed for such purposes and that their failure in such cases could lead to death, personal injury, or severe property or environmental damage for which Bountii is not responsible;"
Me he heeeeeee
Sorry for the oversight; we just added "unmanned aircraft" to that list.
What about to build guns which are intended to kill human beings?
Maybe they use Java, which has long had such restrictions in its license, or another platform with those TOS.
(I did once use Java for offline processing of data at a nuclear reactor research facility, but human life was obviously not at stake.)
(I did once use Java for offline processing of data at a nuclear reactor research facility, but human life was obviously not at stake.)
It's not necessarily a problem if customers feel pinched: you may even be able to benefit from it, by making things that save money.
Funny, you can take the exact same software and position it as a totally different product in a different economy.
Instead of "This software does a better job," imagine, "Our subscription fee is 10% your current cost of ownership. How will that affect your budget?"
Once your customers start shopping with a "recession mindset", you'll already be positioned before your competitors.
Without changing a single line of code.
Funny, you can take the exact same software and position it as a totally different product in a different economy.
Instead of "This software does a better job," imagine, "Our subscription fee is 10% your current cost of ownership. How will that affect your budget?"
Once your customers start shopping with a "recession mindset", you'll already be positioned before your competitors.
Without changing a single line of code.
"Last year you had to be prepared to explain how your startup was viral. Next year you'll have to explain how it's recession-proof."
In my experience, what's true of investors here is also true of potential co-founders. It's so much easier to get other people to work with you if your project is in a trendy field or appeals to the dominant logic of the afternoon. And it's really really frustrating.
/end rant
In my experience, what's true of investors here is also true of potential co-founders. It's so much easier to get other people to work with you if your project is in a trendy field or appeals to the dominant logic of the afternoon. And it's really really frustrating.
/end rant
Think of it as an easy way to screen out people who would be uncreative and uncommited. Less signal, but a higher signal to noise ratio.
It felt like Paul was going to make a hard statement like that, but edited it.
But I was thinking, "If the economy is stopping you, you're not the type to start one."
But I was thinking, "If the economy is stopping you, you're not the type to start one."
I never said it in the essay, but we have actually been thinking it at YC. One of the hardest things we have to do in the selection process is filter out people who are smart but uncommitted. (Smartness is much easier to judge than commitment in a 10-minute interview.) And now the economy is going to be doing it for us. So frankly I'd prefer to be operating in a mild recession. Unfortunately this one sounds like it is scheduled to be a few notches above mild.
My tiny startup has a small but stable amount of funding. In our case, it's enough to provide a two-year runway to finish development and iterate the product a couple of times before reaching break-even.
Up until this month, I've had trouble finding A-list programmers because I don't offer a large salary and benefits. This month, I've suddenly found it easier to attract high-skill employees and I expect it to get easier still as the recession deepens. Many are involved in loss-generating startups which they anticipate will soon fail as funding dries up. (Not all these experts choose to return to grad school...some, for instance, are too old for that culture shift or don't have liquid assets to sustain them.)
As you discuss, the recession may make it easier or harder for startups depending on their value proposition and their reliance on additional investments. I encourage you to write on how easier access to expert programmers changes the equation. In my case, I must decide whether to commit our resources to, say, hire another brilliant programmer because it's now possible OR to hold at our current headcount to maximize survivability.
Another variable is whether brilliant hires in this economy are likely to stick with the company when the economy improves in, say 12-18 months. An HR expert who's weathered a few of these cycles pointed out that while it's easier to hire good people in a recession, some of these hires are more likely to jump ship when the economy turns around. I think the description would be "fair weather hires".
Up until this month, I've had trouble finding A-list programmers because I don't offer a large salary and benefits. This month, I've suddenly found it easier to attract high-skill employees and I expect it to get easier still as the recession deepens. Many are involved in loss-generating startups which they anticipate will soon fail as funding dries up. (Not all these experts choose to return to grad school...some, for instance, are too old for that culture shift or don't have liquid assets to sustain them.)
As you discuss, the recession may make it easier or harder for startups depending on their value proposition and their reliance on additional investments. I encourage you to write on how easier access to expert programmers changes the equation. In my case, I must decide whether to commit our resources to, say, hire another brilliant programmer because it's now possible OR to hold at our current headcount to maximize survivability.
Another variable is whether brilliant hires in this economy are likely to stick with the company when the economy improves in, say 12-18 months. An HR expert who's weathered a few of these cycles pointed out that while it's easier to hire good people in a recession, some of these hires are more likely to jump ship when the economy turns around. I think the description would be "fair weather hires".
From the news, the government sure seems to be doing its best to make it worse.
Intuitively that makes sense but I'm not sure if it's actually true. It's relatively easy to convince someone who would otherwise go into hedge funds to instead do a web startup with you. It's much more difficult, however, to convince that person to do a startup to the field of, say, ethnic pharmacology. That doesn't mean the hedge fund guy would necessarily make a bad partner for a web startup though. (Stereotypes about finance people aside.)
Also, I know pg says that not being able to find a cofounder after a certain point signals a lack of competence or a bad idea, which is generally of correct, but also realize that in some areas finding a cofounder is literally 10x harder than in others-- independent of the merits of the founder or the idea.
Also, I know pg says that not being able to find a cofounder after a certain point signals a lack of competence or a bad idea, which is generally of correct, but also realize that in some areas finding a cofounder is literally 10x harder than in others-- independent of the merits of the founder or the idea.
... then move.
I think it's fairly easy to write those things. What will be more interesting is actual data after a few YC rounds in a weaker economy.
pg was a lot more fun when he used to talk about other things than making money all the time.
One of the strange consequences of writing about several mostly unrelated topics is that you pick up readers with quite different interests. Then whatever you write next, the ones not interested in that topic complain that you've jumped the shark. I doubt I've written a single essay since about 2002 when someone didn't say something of the form "pg was ok when he was writing about x, but I wish he would stop writing about y."
And incidentally, it's not the making money aspect of startups that interests me the most. I'm mostly interested in startups as agents of change. We could right now be in the middle of a shift on the scale of the Industrial Revolution. Or not; always hard to tell from so close. But there is certainly something interesting happening.
And incidentally, it's not the making money aspect of startups that interests me the most. I'm mostly interested in startups as agents of change. We could right now be in the middle of a shift on the scale of the Industrial Revolution. Or not; always hard to tell from so close. But there is certainly something interesting happening.
There's a wonderful quote from Brian Eno about the conservative force that comes from having people who like your work:
"I'm afraid to say that admirers can be a tremendous force for conservatism, for consolidation. Of course it's really wonderful to be acclaimed for things you've done - in fact it's the only serious reward, because it makes you think "it worked! I'm not isolated!" or something like that, and it makes you feel gratefully connected to your own culture. But on the other hand, there's a tremendously strong pressure to repeat yourself, to do more of that thing we all liked so much. I can't do that - I don't have the enthusiasm to push through projects that seem familiar to me ( - this isn't so much a question of artistic nobility or high ideals: I just get too bloody bored), but at the same time I do feel guilt for 'deserting my audience' by not doing the things they apparently wanted. I'd rather not feel this guilt, actually, so I avoid finding out about situations that could cause it. The problem is that people nearly always prefer what I was doing a few years earlier - this has always been true. The other problem is that so, often, do I! Discovering things is clumsy and sporadic, and the results don't at first compare well with the glossy and lauded works of the past. You have to keep reminding yourself that they went through that as well, otherwise they become frighteningly accomplished. That's another problem with being made to think about your own past - you forget its genesis and start to feel useless awe towards your earlier self: "How did I do it? Wherever did these ideas come from?". Now, the workaday everyday now, always looks relatively less glamorous than the rose-tinted then (except for those magic hours when your finger is right on the pulse, and those times only happen when you've abandoned the lifeline of your own history)."
"I'm afraid to say that admirers can be a tremendous force for conservatism, for consolidation. Of course it's really wonderful to be acclaimed for things you've done - in fact it's the only serious reward, because it makes you think "it worked! I'm not isolated!" or something like that, and it makes you feel gratefully connected to your own culture. But on the other hand, there's a tremendously strong pressure to repeat yourself, to do more of that thing we all liked so much. I can't do that - I don't have the enthusiasm to push through projects that seem familiar to me ( - this isn't so much a question of artistic nobility or high ideals: I just get too bloody bored), but at the same time I do feel guilt for 'deserting my audience' by not doing the things they apparently wanted. I'd rather not feel this guilt, actually, so I avoid finding out about situations that could cause it. The problem is that people nearly always prefer what I was doing a few years earlier - this has always been true. The other problem is that so, often, do I! Discovering things is clumsy and sporadic, and the results don't at first compare well with the glossy and lauded works of the past. You have to keep reminding yourself that they went through that as well, otherwise they become frighteningly accomplished. That's another problem with being made to think about your own past - you forget its genesis and start to feel useless awe towards your earlier self: "How did I do it? Wherever did these ideas come from?". Now, the workaday everyday now, always looks relatively less glamorous than the rose-tinted then (except for those magic hours when your finger is right on the pulse, and those times only happen when you've abandoned the lifeline of your own history)."
"... We could right now be in the middle of a shift on the scale of the Industrial Revolution. Or not; always hard to tell from so close. But there is certainly something interesting happening ..."
Internet of things? ~ http://en.wikipedia.org/wiki/Internet_of_Things which Bruce Stirling has been writing about (Shaping Things, 2005) ~ http://en.wikipedia.org/wiki/Spime#Novels Ipso? (IP for Smart Objects) ~ http://www.google.com.au/search?q=Ipso+ip+smart+objects IP enabled things when IPV6 rolls out? These ideas are related to this article ~ http://news.ycombinator.com/item?id=333542
Internet of things? ~ http://en.wikipedia.org/wiki/Internet_of_Things which Bruce Stirling has been writing about (Shaping Things, 2005) ~ http://en.wikipedia.org/wiki/Spime#Novels Ipso? (IP for Smart Objects) ~ http://www.google.com.au/search?q=Ipso+ip+smart+objects IP enabled things when IPV6 rolls out? These ideas are related to this article ~ http://news.ycombinator.com/item?id=333542
Don't stop writing about anything. Write more on more diverse topics.
I think one problem of the Web is that it can reinforce one-dimensionality in some people. People seek out only the narrow set of things they are interested in instead of taking advantage of the breadth it has to offer. So you get people complaining that pg or Joel Spolsky don't talk about what they used to talk about anymore.
That's a really bad place to put yourself. My business ideas are pretty far from what I see discussed here, but I still get a lot of useful knowledge from hanging around. I'd say that the fact that the startups here are different from what I'm likely to do is valuable in its own way: forces me to see the common technology from another perspective and that itself generates further ideas.
That's a really bad place to put yourself. My business ideas are pretty far from what I see discussed here, but I still get a lot of useful knowledge from hanging around. I'd say that the fact that the startups here are different from what I'm likely to do is valuable in its own way: forces me to see the common technology from another perspective and that itself generates further ideas.
Incidentally, if you had to pick a single rubric by which you could gauge the eventual interestingness of an agent of change, you could do a lot worse than profitability.
I'm guessing a lot of the revolutionaries in the Industrial Revolution weren't thinking so much about causing a revolution. They were "just" trying to get rich.
I'm guessing a lot of the revolutionaries in the Industrial Revolution weren't thinking so much about causing a revolution. They were "just" trying to get rich.
Can you point to one essay where he uses the phrase "make money" or some variant thereof?
More to the point: To me, a startup isn't about money. It's about freedom. That's where I've found much to like in his essays.
More to the point: To me, a startup isn't about money. It's about freedom. That's where I've found much to like in his essays.
In http://www.paulgraham.com/start.html, Paul writes
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.
So writing about startups is always implicitly about making money. (Not that there's anything wrong with that.)
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.
So writing about startups is always implicitly about making money. (Not that there's anything wrong with that.)
But "solving the money problem" is about gaining the freedom to do what you love, without having to worry about putting food on the table. The problem is really a problem of freedom, which it just so happens can be solved by acquiring a load of dosh. So it's only about making money as a means to the end of freedom.
Why would you gamble with your freedom? Most of Paul Graham's fans could easily do 3 years of lawschool at a top tier school and could then work 5 years and retire for life.
5 years is a bit unreasonable. Take a look at the salary chart on Wikipedia:
http://en.wikipedia.org/wiki/Law_firm#Salaries
Typically, you're about $160k in debt from law school, so the first year is spent paying that back. The next 4 years taken together is only $795k, nowhere near enough to retire for life. All the associate years together is only about $1.6M, still not enough to retire after 11 years.
Then you have to make partner; if you don't, you're out of the firm and usually have to set yourself up as a sole proprietor. If you do make partner, you're set for life, but at 11 years getting there, the road is nearly as long as becoming a tenured professor and usually longer than becoming a successful entrepreneur.
http://en.wikipedia.org/wiki/Law_firm#Salaries
Typically, you're about $160k in debt from law school, so the first year is spent paying that back. The next 4 years taken together is only $795k, nowhere near enough to retire for life. All the associate years together is only about $1.6M, still not enough to retire after 11 years.
Then you have to make partner; if you don't, you're out of the firm and usually have to set yourself up as a sole proprietor. If you do make partner, you're set for life, but at 11 years getting there, the road is nearly as long as becoming a tenured professor and usually longer than becoming a successful entrepreneur.
In your search did you find any other examples? The original comment said "all the time". That's a very different reading from mine and I'm frankly not sure where it comes from. Even that essay you cite, the quote is a tangent. It's not the central thesis.
To a hacker's mind, solving the money problem is less about money in and of itself and more about making efficient use of our time. Wasting time is the worst of sins.
coolly puy
Seems to me that making money has always been a common theme in pg's essays. The "you should start a startup" message is stronger than ever, but that's always been there to some extent as well.
http://www.paulgraham.com/avg.html
http://www.paulgraham.com/road.html
http://www.paulgraham.com/gap.html
http://www.paulgraham.com/hiring.html
http://www.paulgraham.com/icad.html
http://www.paulgraham.com/avg.html
http://www.paulgraham.com/road.html
http://www.paulgraham.com/gap.html
http://www.paulgraham.com/hiring.html
http://www.paulgraham.com/icad.html
I like making money, and PG is an authority on the subject, so I enjoy it.
I feel this way as well--except I think I'm what he calls a "hacker", and as someone mentions above, I only like making money--so far in my professional career, anyway--because it represents freedom to work on stuff I care about, in some sense. Usually people call this "time"; if you have the money to keep yourself alive without working constantly on things you don't care about, then you have time for things you care about. I think of it as something more like "energy" myself, since even when I don't have a paying job at all (and thus have lots and lots of time), I still can only stand working in a few fairly short, intense bursts per day, due to the rise and fall of my inspiration and fatigue and so forth.
But back onto Mr. Graham: Since I'm a "hacker", I already know a lot of stuff he knows about software development, and in fact it's clear that I also know a lot that he doesn't address in his essays and probably isn't even aware of. I mean, I'm a video game developer who writes in Java on Windows machines, and I've got good reason to be such. Why should I pay attention to Mr. Lisp here who scorns Windows and has never used Java, and who doesn't even mention playing games, let alone programming them?* I'm sure I could learn some things from him, but he is ignorant of my world, however much he may know about his own kind of software development.
He is far from ignorant, however, about startups. And he's got interesting things to say about various other, non-technical subjects too. So let him talk about those!
* I suspect there are plenty of Mac fans and Lisp fans and C++ fans among this site's readers who could snappily answer this question. I do not have time to armor this comment against techie criticism; that would itself require an essay. Suffice to say that I claim I could if I wanted to. :)
But back onto Mr. Graham: Since I'm a "hacker", I already know a lot of stuff he knows about software development, and in fact it's clear that I also know a lot that he doesn't address in his essays and probably isn't even aware of. I mean, I'm a video game developer who writes in Java on Windows machines, and I've got good reason to be such. Why should I pay attention to Mr. Lisp here who scorns Windows and has never used Java, and who doesn't even mention playing games, let alone programming them?* I'm sure I could learn some things from him, but he is ignorant of my world, however much he may know about his own kind of software development.
He is far from ignorant, however, about startups. And he's got interesting things to say about various other, non-technical subjects too. So let him talk about those!
* I suspect there are plenty of Mac fans and Lisp fans and C++ fans among this site's readers who could snappily answer this question. I do not have time to armor this comment against techie criticism; that would itself require an essay. Suffice to say that I claim I could if I wanted to. :)
What kind of situation do you think we're in right now? I think it's a little relevant to the times ;)
I like the way it is. Thank you pg, I love this easy.
It is nice to read some sober thinking on the economy...
PG has it exactly right. Startups are HARD and there are so many factors that are more important than the state of economy.
The odds of success are low enough with a startup already that the economy shouldn't really change the decision making process.
PG has it exactly right. Startups are HARD and there are so many factors that are more important than the state of economy.
The odds of success are low enough with a startup already that the economy shouldn't really change the decision making process.
Don't forget that economic downturns, whether real or imagined, are another barrier to entry for your competition.
"What if you quit your job to start a startup that fails, and you can't find another? Good hackers can always get some kind of job. It might not be your dream job, but you're not going to starve."
Hmm, isn't that kind of a low bar? I worry that I'll be 40 before I know it, with no savings to show for my years of work. Isn't opportunity cost a concern?
Perhaps PG really is writing for the young.
Hmm, isn't that kind of a low bar? I worry that I'll be 40 before I know it, with no savings to show for my years of work. Isn't opportunity cost a concern?
Perhaps PG really is writing for the young.
I sure get the same impression. Start ups are for twenty somethings who are not married. If you are 30+, married
and with a mortgage then forget it.
I'm 26, married with a mortgage, car payment, student loans, etc. The economy isn't going to stop me - my wife is willing to sell our house at the drop of a hat if we have to, move to another city if we have to, etc. You sacrifice short term for the long term gain, and if you're married to someone that supports you, they ride the roller coaster with you.
I wouldn't go that far. Startups and freelancing in general present definite opportunities and advantages. But the risks need to be aired out more. Mental preparation makes success more likely.
I'm 39, married, have a 7yo daughter, but luckily no mortgage. But I have $425 on a savings account to balance off having no mortgage :-)
And I'm throat deep in a startup for 2 years already, it's just a beginning.
"investors tend to be less willing to invest in bad times. They shouldn't be. "
Angels probably should. Many of them just had a 20%+ decrease in their net wealth. Investing is an activity for them, like golf, not a profession. They shouldn't make themselves feel uncomfortable financially.
There's a difference between which action has the highest EV and which one you should take.
Angels probably should. Many of them just had a 20%+ decrease in their net wealth. Investing is an activity for them, like golf, not a profession. They shouldn't make themselves feel uncomfortable financially.
There's a difference between which action has the highest EV and which one you should take.
But don't you think they'd witness a similar discount in the valuations?
Of course, but they've already achieved independent wealth, why risk it? Extra money to them is just icing on the cake at this point. Investing is basically a hobby for them, and when their money starts to evaporate, it's the first thing they will (and should) cut out.
Do angels really risk money that they can't afford to lose? I'd think that most of them would sock away enough to remain financially independent in safe investments, and then do their investing with "play money".
They probably don't risk money they can't afford to lose. But if you figure an angel invests 20% of his money in startups, and the stock market comes along and reduces his total net worth by 20%, how much is he going to invest now? How much if he invests 10% in startups and the stock market hits him for 30%?
It may not be 0, because he may have had other expenses and investments that he prioritizes angel investing over, but it probably won't still be 20%. The total dollar amount he'll be willing to stick into high-risk investments will probably decrease.
I'm talking on average, of course. Each individual will vary according to their net worth, lifestyle, investment philosophy, etc.
It may not be 0, because he may have had other expenses and investments that he prioritizes angel investing over, but it probably won't still be 20%. The total dollar amount he'll be willing to stick into high-risk investments will probably decrease.
I'm talking on average, of course. Each individual will vary according to their net worth, lifestyle, investment philosophy, etc.
Great article and the example from the 70s (brk has some good points) was a good one. A LOT of innovation happened in what were very difficult times on a macro level. Living / working cheap is absolutely key. I knew the economy was going to tank back in January when I started my company, but I still did it.
I'd also like to see more "inventions" (another good point from brk). There may be a certain amount of critical mass of development that has to happen around other technologies. The last 10 years or so have seen optimization in the development cycle for web apps, resulting in their relative low barrier of entry today. It could be my ignorance, but I don't detect the same level of commoditization in other industries. Of course, a higher barrier of entry is great for the people already involved.
Another way to look at the "inventions" issue is the rather quick evolution of non-web technologies to web accessible interfaces. We've seen this happen with telephony, video, radio, print, television, navigation, security systems, and many more, I'm sure. It's pretty amazing actually. I think you'll continue to see more of this over the next few years, so we'll all still have stuff to work on.
I'd also like to see more "inventions" (another good point from brk). There may be a certain amount of critical mass of development that has to happen around other technologies. The last 10 years or so have seen optimization in the development cycle for web apps, resulting in their relative low barrier of entry today. It could be my ignorance, but I don't detect the same level of commoditization in other industries. Of course, a higher barrier of entry is great for the people already involved.
Another way to look at the "inventions" issue is the rather quick evolution of non-web technologies to web accessible interfaces. We've seen this happen with telephony, video, radio, print, television, navigation, security systems, and many more, I'm sure. It's pretty amazing actually. I think you'll continue to see more of this over the next few years, so we'll all still have stuff to work on.
"If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders."
This is confusing -- wasn't Y Combinator started in 2005? Was PG funding startups before that?
This is confusing -- wasn't Y Combinator started in 2005? Was PG funding startups before that?
Yes, and I have no idea. We should see in 3-5 years whether that statement is true or not. I'd guess not, although I'm not sure to what degree.
Your article is very timely. In fact I have a start-up that I have been building with a small team paid by sweat-equity. I also have an excellent and motivated business partner & co-founder who I trust and I keep on admiring his dedication and motivation despite having the most difficult time in raising seed money (apparently a requirement/excuse for VCs to event get involved). We are building a Web utility that facilitates information consumption. We are testing it with friends and family and the results are very encouraging. Given the state of the economy and the lack of financial resources, we have decided to continue to boot-strap our business and we will be releasing our Web tool for people to use. By the way, I found your article this morning using our product. The idea is to introduce it and demonstrate its usefulness through actual usage and viral distribution. We are also reducing our initial set of features to reduce the risk and wait for a measurable adoption rate to make a stronger case for funding. We are not serial entrepreneurs and deeply believe in what we have. We are convinced that with our passion, on-going re-enforcement from our users, the academic community and peers, we have what we need to fuel our passion and success. We are confident that we will succeed regardless of the investor community’s current mood. Thanks for a great article!
Thierry Hubert
Thierry Hubert
This post is almost entirely dead WRONG. It's revenue that matters, period. "People" are not what matters. Satisfied customers matter. If you provide a product or service that people are willing to pay for, then nothing ... NOTHING can take that from you. You don't NEED investors. Get off that trip. This article mentioned that, "the reason Larry and Sergey are so rich is not so much that they've done work worth tens of billions of dollars, but that they were the first investors in Google." Sorry, but again WRONG. The reason they are so rich compared to the rest of us is that we've lost track of the concept that we live in a Shared Fate world. We're all in this together, but we've forgotten that fact. It is physically and philosophically IMPOSSIBLE for any individual human being to be worth BILLIONS more than any other human being. We all put our pants on one leg at a time and we all only have 24 hours in a day. "All men are created equal." Remember that? It's called the Declaration of Independence. I believe your writing eminates from the right motives, but it fosters many of the wrong reactions and sentiments. Find a customer. Provide what the customer requires. No customer, no business. End of story. Yes, this post is intentionally terse and dialectical in order to to elicit meaningful dialog instead of pointless ass kissing.
I agree that felt-value constitutes reality in business, on both sides, the value of having a vendor and the value of having a client, both orbiting a meaningful transaction.
However I balk at the Declaration of Independence as the basis for this. It is part of cosmic law that seemingly disparate parts be unified as events in time and space.
The time prior to now was more available to this awareness, but incompletely conscious of this underlying basis for justice, commerce, etc. We have no pants, basically.
The internet has exposed this issue we have of whether to actually work for the true common good, for the Universal interest and no a niche freedom like americanic liberty or romantic imperial entitlement, or whether we are doing the fun thing - being king, being the man, being the world authority, but not the real, messy, selfless, egoless world leader. The leader serves the universal interest. The merely free do not have this underlying responsibility to the people. Whether in america, rome, babylon, sumaria, russia, the little people and the heavy heavies must be on the same platform, or there is no genuine premise of law.
So that is the dynamic under the problem internet companies have. Solving the underlying dynamic will be required to solve the problem on top - revenue. Once this dynamic of congruence with the universe fruits, as it is today, there will no longer be quixotism in human interactions.I agree that felt-value constitutes reality in business, on both sides, the value of having a vendor and the value of having a client, both orbiting a meaningful transaction.
However I balk at the Declaration of Independence as the basis for this. It is part of cosmic law that seemingly disparate parts be unified as events in time and space.
The time prior to now was more available to this awareness, but incompletely conscious of this underlying basis for justice, commerce, etc. We have no pants, basically.
The internet has exposed this issue we have of whether to actually work for the true common good, for the Universal interest and no a niche freedom like americanic liberty or romantic imperial entitlement, or whether we are doing the fun thing - being king, being the man, being the world authority, but not the real, messy, selfless, egoless world leader. The leader serves the universal interest. The merely free do not have this underlying responsibility to the people. Whether in america, rome, babylon, sumaria, russia, the little people and the heavy heavies must be on the same platform, or there is no genuine premise of law.
So that is the dynamic under the problem internet companies have. Solving the underlying dynamic will be required to solve the problem on top - revenue. Once this dynamic of congruence with the universe fruits, as it is today, there will no longer be quixotism in human interactions.
However I balk at the Declaration of Independence as the basis for this. It is part of cosmic law that seemingly disparate parts be unified as events in time and space.
The time prior to now was more available to this awareness, but incompletely conscious of this underlying basis for justice, commerce, etc. We have no pants, basically.
The internet has exposed this issue we have of whether to actually work for the true common good, for the Universal interest and no a niche freedom like americanic liberty or romantic imperial entitlement, or whether we are doing the fun thing - being king, being the man, being the world authority, but not the real, messy, selfless, egoless world leader. The leader serves the universal interest. The merely free do not have this underlying responsibility to the people. Whether in america, rome, babylon, sumaria, russia, the little people and the heavy heavies must be on the same platform, or there is no genuine premise of law.
So that is the dynamic under the problem internet companies have. Solving the underlying dynamic will be required to solve the problem on top - revenue. Once this dynamic of congruence with the universe fruits, as it is today, there will no longer be quixotism in human interactions.I agree that felt-value constitutes reality in business, on both sides, the value of having a vendor and the value of having a client, both orbiting a meaningful transaction.
However I balk at the Declaration of Independence as the basis for this. It is part of cosmic law that seemingly disparate parts be unified as events in time and space.
The time prior to now was more available to this awareness, but incompletely conscious of this underlying basis for justice, commerce, etc. We have no pants, basically.
The internet has exposed this issue we have of whether to actually work for the true common good, for the Universal interest and no a niche freedom like americanic liberty or romantic imperial entitlement, or whether we are doing the fun thing - being king, being the man, being the world authority, but not the real, messy, selfless, egoless world leader. The leader serves the universal interest. The merely free do not have this underlying responsibility to the people. Whether in america, rome, babylon, sumaria, russia, the little people and the heavy heavies must be on the same platform, or there is no genuine premise of law.
So that is the dynamic under the problem internet companies have. Solving the underlying dynamic will be required to solve the problem on top - revenue. Once this dynamic of congruence with the universe fruits, as it is today, there will no longer be quixotism in human interactions.
9Keme wrote, "The merely free do not have this underlying responsibility to the people."
Beautiful. Declaration of INTERdependence time?
Beautiful. Declaration of INTERdependence time?
"Last year you had to be prepared to explain how your startup was viral. Next year you'll have to explain how it's recession-proof."
You should have to explain how it's going to make money, no matter the economy. Founders need to stop thinking they can just magically monetize later after reaching one fobillion users. If it happens, awesome, but don't bank on it. Google was an anomaly, but you wouldn't know it from the attitudes of others towards them.
You should have to explain how it's going to make money, no matter the economy. Founders need to stop thinking they can just magically monetize later after reaching one fobillion users. If it happens, awesome, but don't bank on it. Google was an anomaly, but you wouldn't know it from the attitudes of others towards them.
Do you have examples of sites with a "fobillion" (or close) users that still failed? I'm really curious. The examples I can think of, like friendster, really went under because of lack of users.
I agree that you shouldn't bank on getting this fobillion users and after that monetizing them. But that's because the real hard part is getting that much users in the first place.
I agree that you shouldn't bank on getting this fobillion users and after that monetizing them. But that's because the real hard part is getting that much users in the first place.
That was an obvious hyperbole. The point is: 50,000 or even 100,000 users =! success, and you don't necessarily need users to make money (although it helps!).
The grow-users-before-revenue strategy has several spectacular success stories: Google, YouTube, Facebook, Flickr, MySpace, etc. etc.
That's not to say it's the only valid strategy, but it's certainly a valid strategy. In fact, it probably has the highest payoff, albeit with the highest variance.
That's not to say it's the only valid strategy, but it's certainly a valid strategy. In fact, it probably has the highest payoff, albeit with the highest variance.
-Google, obviously. Anomaly.
-Youtube might have been fucked if it didn't get acquired. It was hemorrhaging cash like Pac Man Jones & Robert Downey Jr. trapped in a strip club.
-Flickr was _priced_ like a talent acquisition.
-Like most acquisitions, the Myspace acquisition has largely failed according to Google, their primary advertiser. Additionally, Myspace's contribution to News Corp's earnings have been piss poor.
I agree that it's a valid strategy (especially for a company like Justin.TV), but IMHO opinion most companies have tunnel vision when it comes to turning in to a real business. It almost makes them risk seeking. Although getting acquired is nice, it sure as hell isn't a strategy - it's a cop out.
I'm trying to come up with companies that tried this strategy and either worked (issued dividends continuously) or was acquired and actually benefited (i.e. was worth their acquisition price based on DCF) their acquiring company. I'm sure there are examples, I just can't think of any off the top of my head.
-Youtube might have been fucked if it didn't get acquired. It was hemorrhaging cash like Pac Man Jones & Robert Downey Jr. trapped in a strip club.
-Flickr was _priced_ like a talent acquisition.
-Like most acquisitions, the Myspace acquisition has largely failed according to Google, their primary advertiser. Additionally, Myspace's contribution to News Corp's earnings have been piss poor.
I agree that it's a valid strategy (especially for a company like Justin.TV), but IMHO opinion most companies have tunnel vision when it comes to turning in to a real business. It almost makes them risk seeking. Although getting acquired is nice, it sure as hell isn't a strategy - it's a cop out.
I'm trying to come up with companies that tried this strategy and either worked (issued dividends continuously) or was acquired and actually benefited (i.e. was worth their acquisition price based on DCF) their acquiring company. I'm sure there are examples, I just can't think of any off the top of my head.
Google and Yahoo are both obvious successes. Amazon is another. One Google outweighs hundreds or thousands of failures. You can't dismiss them as merely "anomolous" - among the biggest internet companies most of them followed this strategy.
MySpace's acquisition hasn't failed: it's a profitable enterprise for NewsCorp and still growing. It paid back the purchase price in the first year! So that's a success, not a failure.
The jury is still out on YouTube, Facebook, and Flickr as to whether they will be long term businesses, so they are not yet data points one way or another. They are clear success stories for the founders though.
MySpace's acquisition hasn't failed: it's a profitable enterprise for NewsCorp and still growing. It paid back the purchase price in the first year! So that's a success, not a failure.
The jury is still out on YouTube, Facebook, and Flickr as to whether they will be long term businesses, so they are not yet data points one way or another. They are clear success stories for the founders though.
Amazon had a business model from day 1. I don't think they really apply to this conversation. They weren't profitably early on, but that's way different from not having business model.
"Among the biggest internet companies, most of them followed this strategy."
You could be right, but I honestly have no idea. What sources are you using? How are you measuring this?
"It paid back the purchase price in the first year!"
Wait, what? Revenue or profit? Revenue > Acquisition Cost != success.
"They are clear success stories for the founders though."
Definitely, which is probably the most important thing of all.
"Among the biggest internet companies, most of them followed this strategy."
You could be right, but I honestly have no idea. What sources are you using? How are you measuring this?
"It paid back the purchase price in the first year!"
Wait, what? Revenue or profit? Revenue > Acquisition Cost != success.
"They are clear success stories for the founders though."
Definitely, which is probably the most important thing of all.
From the Alexa top 20 global (http://www.alexa.com/site/ds/top_sites?ts_mode=global&la...):
Yahoo - users before revenue, success
Google - users before revenue, success
YouTube - users before revenue, undecided
Microsoft - revenue before users, although their internet properties consistently lose money. Not really an internet company.
MySpace - users before revenue, success (MySpace is profitable already)
Facebook - users before revenue, undecided
Blogger - users before revenue, probably a success although google doesn't release numbers so it's hard to say how much money they make on it
Orkut - same as Blogger
RapidShare - users before revenue, success (very profitable freemium model)
Baidu - I'm not sure. I presume they follow the same path as Google did, but with an obvious example of how to succeed already in place.
QQ - users before revenue, success (virtual goods turn out to be a great way to monetize a free chat product in China)
eBay - revenue before users; they didn't make auctions free
Hi5 - users before revenue, undecided
In addition to being the biggest internet companies, these are among the most profitable. Several of the top 20 were acquired by other companies, making it difficult to judge how successful they would be independently. Several are still so new it's hard to tell. There's exactly one which took money over user growth (eBay).
Yahoo - users before revenue, success
Google - users before revenue, success
YouTube - users before revenue, undecided
Microsoft - revenue before users, although their internet properties consistently lose money. Not really an internet company.
MySpace - users before revenue, success (MySpace is profitable already)
Facebook - users before revenue, undecided
Blogger - users before revenue, probably a success although google doesn't release numbers so it's hard to say how much money they make on it
Orkut - same as Blogger
RapidShare - users before revenue, success (very profitable freemium model)
Baidu - I'm not sure. I presume they follow the same path as Google did, but with an obvious example of how to succeed already in place.
QQ - users before revenue, success (virtual goods turn out to be a great way to monetize a free chat product in China)
eBay - revenue before users; they didn't make auctions free
Hi5 - users before revenue, undecided
In addition to being the biggest internet companies, these are among the most profitable. Several of the top 20 were acquired by other companies, making it difficult to judge how successful they would be independently. Several are still so new it's hard to tell. There's exactly one which took money over user growth (eBay).
Not sure it's statistically significant, but very insightful overview - thank you.
One quick nitpick: I'd argue Rapidshare had a business model before users, even if it technically had users before revenue.
One quick nitpick: I'd argue Rapidshare had a business model before users, even if it technically had users before revenue.
Listen, I understand that this is the kind of thing you might expect to read in a 1998 edition of Wired and does not fit with the 'getting real' mantra, but (at the very least) eyeballs are monetizable trough advertisement. It's a time tested strategy that has worked just fine in other mediums.
Sites like youtube and myspace did not need to worry about the monetizing part as they got acquired quickly, had they not, maybe the story would be different. I still can't think of sites with a huge and active userbase that failed.
Sites like youtube and myspace did not need to worry about the monetizing part as they got acquired quickly, had they not, maybe the story would be different. I still can't think of sites with a huge and active userbase that failed.
Ugh that getting real shit makes me barf. Applying blanket statements like "you shouldn't need to take VC money" only demonstrates the tunnel vision of working on one business for so long. Much of their advice is very good, but there's too many absolutes for my liking..
Anyway, all I'm saying is too many people are applying the blanket statement "worry about monetization later" when not all of them should be.
In my opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
Anyway, all I'm saying is too many people are applying the blanket statement "worry about monetization later" when not all of them should be.
In my opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
>In My opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Completely agree, but the possible payoff in the latter case tends to be quite higher.
>Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
I think that's hard to say. Take hotmail for example, while it might have not generated a $100 mil in revenues yet (or maybe it has?), I would doubt that the purchase was a strategic decision they regret over at Redmond. I think the same could be said for Youtube. If NewsCorp has regrets over the MySpace purchase, they are quite likely much more due to FB´s growth than to MySpace's current revenue.
If all these companies decided to grow users before revenue when they where a startup, it makes little sense to try to squeeze revenues quickly out of them, at the expense of user growth, once they've been acquired by a company with much larger pockets. I think the logical thing to do, in those cases, would be to continue the same growth strategy for a few years while calmly exploring ways to monetize them.
Startups that don´t get acquired are obviously more pressed to find a way to monetize quickly.
Completely agree, but the possible payoff in the latter case tends to be quite higher.
>Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
I think that's hard to say. Take hotmail for example, while it might have not generated a $100 mil in revenues yet (or maybe it has?), I would doubt that the purchase was a strategic decision they regret over at Redmond. I think the same could be said for Youtube. If NewsCorp has regrets over the MySpace purchase, they are quite likely much more due to FB´s growth than to MySpace's current revenue.
If all these companies decided to grow users before revenue when they where a startup, it makes little sense to try to squeeze revenues quickly out of them, at the expense of user growth, once they've been acquired by a company with much larger pockets. I think the logical thing to do, in those cases, would be to continue the same growth strategy for a few years while calmly exploring ways to monetize them.
Startups that don´t get acquired are obviously more pressed to find a way to monetize quickly.
" Take hotmail for example, while it might have not generated a $100 mil in revenues yet"
I'd bet it's way more than that due to volume, brand recognition and since it directly circulates hotmail users to microsoft properties. But similar to you, I don't know either. However, I think that's a great example of a user acquisition that has worked so far - thank you - I was having problems thinking of examples.
Not to sounds too 37signally, but what about the freemium model?
I'd bet it's way more than that due to volume, brand recognition and since it directly circulates hotmail users to microsoft properties. But similar to you, I don't know either. However, I think that's a great example of a user acquisition that has worked so far - thank you - I was having problems thinking of examples.
Not to sounds too 37signally, but what about the freemium model?
I think it's great, but don't see it as a viable option for some products.
I also think micro-payments can be an option one day when someone gets around to making it less painful and more available. I think this will probably involve cellphone companies but I digress.
In any case, I think selling ads can be a very profitable route for others.
I also think micro-payments can be an option one day when someone gets around to making it less painful and more available. I think this will probably involve cellphone companies but I digress.
In any case, I think selling ads can be a very profitable route for others.
Don't forget WebTV @ 400 million and god knows whether that was a success.
From my pov those are anomalies, rather than the norm.
For every Google, Youtube and Facebook, there are thousands of startups with similar strategies that fail.
I think it is safer to go the long route and start small, working your way to the top, charging a price right from the beginning. If your application is useful, users will pay for it.
I think it is safer to go the long route and start small, working your way to the top, charging a price right from the beginning. If your application is useful, users will pay for it.
I exactly agree that they're anomalies...but they're by far the most profitable anomalies. Almost all the top websites grew users before revenue! High variance, high payoff. It is certainly safer to start small and grow revenue first; it's also likely not to produce the next Google (or Yahoo, or Facebook, or YouTube, etc.)
By doing that you limit your growth rate, and your maximum size.
Charging up front puts people off, whereas if you slowly incrementally introduce revenue later, they will probably be hooked by then.
Charging up front puts people off, whereas if you slowly incrementally introduce revenue later, they will probably be hooked by then.
When you're introducing revenue later, you have to provide extra value. This means more features and so you're endangering your core values.
When you're starting to charge for existing features, by limiting the free accounts, you will surely upset your existing users. Google tried to introduce advertising in YouTube videos, and the community was not happy about it ... and imagine a site like YouTube placing a limit on how many videos you can watch. No matter how hooked your users are, you still can lose them, not to mention that popular services like YouTube got cloned and there is competition waiting for those users.
People have been charging money or other goods in exchange for products/services since forever. I don't really understand this trend of releasing products for free. The only viable exit strategy is for your company to be acquired by a big player, but if you want your business model to be sustainable you should question this trend.
When you're starting to charge for existing features, by limiting the free accounts, you will surely upset your existing users. Google tried to introduce advertising in YouTube videos, and the community was not happy about it ... and imagine a site like YouTube placing a limit on how many videos you can watch. No matter how hooked your users are, you still can lose them, not to mention that popular services like YouTube got cloned and there is competition waiting for those users.
People have been charging money or other goods in exchange for products/services since forever. I don't really understand this trend of releasing products for free. The only viable exit strategy is for your company to be acquired by a big player, but if you want your business model to be sustainable you should question this trend.
I think that is the exact difference between building a "small" business and a startup. Businesses are made to be essentially sustainable from the start (or at least soon after start). Startups are trying to become large in a hurry and are cool with losing a lot of money upfront to generate it later. Obviously however, there are a million examples of companies and businesses that blur the line.
Of the companies in that list the only one that I am sure actually turned a profit is Google. Youtube, Facebook, and MySpace don't have a business model. No idea about Flickr, but iirc they were acquired for a pretty low dollar amount.
Personally I believe a recession is the best time to start a startup. Thinking of the amount of time and effort it takes to get a good startup going (typically), the economy could be coming out of a recession by the time you're ready to seek capital. Sure, you'll have to bootstrap, as angel investors will be far and few between, but it's definitley do-able.
I've got 3 different ventures going on right now that I've been working on for 2 years, 1 year, and 6 months, respectively. The one that's 2 years old I won't be ready for venture capital for another 2 years probably. The one that is a year old could theoretically be ready for funding in another year, and the 6 month old I'm hoping to not even seek funding, but to just grow from the ground up into a profitable business a year from now as well. The three somewhat interconnect and can use features of each other, which will hopefully help propel each towards success. Either way, I'm taking advantage of the current recession as best as I can. Pageviews are up, my alexa traffic rankings are going the right way, and revenues continue to increase. All good signs that sometimes it's a recession that helps startups. :-)
I've got 3 different ventures going on right now that I've been working on for 2 years, 1 year, and 6 months, respectively. The one that's 2 years old I won't be ready for venture capital for another 2 years probably. The one that is a year old could theoretically be ready for funding in another year, and the 6 month old I'm hoping to not even seek funding, but to just grow from the ground up into a profitable business a year from now as well. The three somewhat interconnect and can use features of each other, which will hopefully help propel each towards success. Either way, I'm taking advantage of the current recession as best as I can. Pageviews are up, my alexa traffic rankings are going the right way, and revenues continue to increase. All good signs that sometimes it's a recession that helps startups. :-)
I totally agree. I used to be dilbert in a cube working for Charles Schwab writing code 10 to 12 hours per day (and weekends) and then poof I got laid off and my job went to India. But before that my co-workers were jumping ship to work at startups and I thought they were nuts. I'm now working on my third startup and this one has a chance because I'm competing with eBay (4cheetahs.com). Even working for a billion dollars company on multi-million dollar project with egotistical personalities decked out all in black attire and goatees doesn't guarantee you won't get laid off or canned for not writing code fast enough.
Now is the perfect time to start a startup becuase you can recruit more people who will work for experience.
My first startup was Big Bear and I recruited engineers off of craigslist for free to compete with Tivo. In a year they had built a new technology to modify (in one minute) any vcr or dvdr to be programmed from a computer through wireless or usb or over the web or a cell phone. Just couldn't get funding. Then I tried competing with Match.com and the site never launched and I focused on recruiting do-nothing MBAs from our countries finest business schools (another waste of time). This time I only care about programmers. I've interviewed more than 100 MBAs they are as different in their views as economists are about the economy and most couldn't write a line of code to save their life. All I care about is building a team of good programmers. Thus far I've found two to join the cause. Site goes up next month and I'm pretty jazzed about that.
If I had a well paid job I wouldn't take the plunge in a startup. I'd be too chicken. But since I've been out of work since 9/11 it's much easier to take the plunge and I don't care nor thinking about the risk. Everything and anything you do in life involves risk. You only live once. You might as well be rich that's my motto.
I searched this comments page for "food" and interestingly, I didn't see any comments pointing out that starting a tech startup is a (temporary) vow of poverty. This is exacerbated in a recession, when it's often more difficult to find investment capital for rapid growth.
A point that seems lost in pg's recent start-the-startup cheerleading is that you need to be able to eat, pay rent, etc. Even if you're in your 20's and have a good chunk of money saved up, how long will it last? A year? Two? What if you don't see a paycheck for that long? Will there really be that many tech jobs available to "fall back on"? Part of the definition of a recession is a contraction of employment. That means tech jobs are less available, too.
These reality checks shouldn't stop anyone, but it'd be nice to see a reminder from Graham once in awhile to do the maths (personal budget etc.) and be realistic. A lot fewer tech workers are in the financial position to start a startup than they realize.
Ramen money indeed!
A point that seems lost in pg's recent start-the-startup cheerleading is that you need to be able to eat, pay rent, etc. Even if you're in your 20's and have a good chunk of money saved up, how long will it last? A year? Two? What if you don't see a paycheck for that long? Will there really be that many tech jobs available to "fall back on"? Part of the definition of a recession is a contraction of employment. That means tech jobs are less available, too.
These reality checks shouldn't stop anyone, but it'd be nice to see a reminder from Graham once in awhile to do the maths (personal budget etc.) and be realistic. A lot fewer tech workers are in the financial position to start a startup than they realize.
Ramen money indeed!
Velshin,
That is reality. But it is also reality that these kind of amounts (if you're careful in what you're spending), can be earned in a few days a month doing something you're good at. Just trust in your own qualities.
That is reality. But it is also reality that these kind of amounts (if you're careful in what you're spending), can be earned in a few days a month doing something you're good at. Just trust in your own qualities.
I believe that beyond 'creating a startup', it is rather INNOVATION that is something that is more than ever needed in times of crisis and recession. That is both true for startup companies and may be even more so for major corporations and brands.
And even more during deep crisis when internal resources are lacking and budget shrinking, major corporations will have no other choice than managing innovation in an 'Open and collaborative' new way, and especially collaborating with innovative startups... These major corporations will therefore have to transform themselves into 'Open innovation' champions faster than what they would have done in a more 'comfortable' economy.
From a crisis to an opportunity ?
PS: this change management mission is the 'raison d'etre' of bluenove (www.bluenove.com), and as its CEO and founder i still consider we are in a startup phase so this article is for the least quite supportive ;-)
I just went ahead and did it, irrespective of what the economy was doing. Twice, no four times. On two continents. Damn the torpedoes and all that. OK, I did niche consulting and picked a business model which very much tried to save the client money. Problem is that niches come and go, and the challenge now is to find a new racket.
I suppose I could try inventing something new. Now is a great time to do it. Of course, I will probably fail, but so what. If I make time to do it, I will certainly have at least a bit more time to ride my bike around and stall that looming congestive heart failure.
But seriously, if you have a little bit of cash, or better, still have a bit of cash coming in, extra help won't get any cheaper than it is now. If I'm in Europe, I'll outsource to the USA.
We never tried to make money - it just happened. Sure, it was much closer to Stallman than Billy Goat, but it paid for the house and will send my kid to MIT.
I suppose I could try inventing something new. Now is a great time to do it. Of course, I will probably fail, but so what. If I make time to do it, I will certainly have at least a bit more time to ride my bike around and stall that looming congestive heart failure.
But seriously, if you have a little bit of cash, or better, still have a bit of cash coming in, extra help won't get any cheaper than it is now. If I'm in Europe, I'll outsource to the USA.
We never tried to make money - it just happened. Sure, it was much closer to Stallman than Billy Goat, but it paid for the house and will send my kid to MIT.
I believe there is no good or bad time to start a startup. As far as economy is concern, it's more dependent on the perspective you take to look at it. I work for a software maker up in northwest, and everytime I think about opening a startup, I meet a few people suggesting against it with economy as the reason. When the economy is good and our company's stock is going up, the normal advice is:"you know you will be much better-off sticking here for some more time because we are doing so good right now." And now when the economy is down and our stocks are hitting the bottom, the advice is: "this is not the right time to leave the company and open a startup. You won't get funding and with our stocks so low, you will be broke bootstrapping your startup."
My perspective: well I got a good idea and great co-founder, let's go for it. We will figure how to survive the economy on the way.
How could I forget. Setting up serve space and a database takes time and money too. And then there is setting up a credit card account so people can pay more easily on your site if you are taking money. Then there's the setting up of the business account at the bank and waiting for eons to get a Federal Tax ID number. I switched over my previous FTID
to my new site from my old site because my old site never launched (thank God) but banks do drag their feet in opening up a business credit card account which is needed to set up a merchant account with Amazon Simple Pay since I won't be allowing PayPal since eBay owns them and I'm competing with eBay. The biggest drawback of a startup is the lack of sleep but the biggest benefit is no commute time so you save a fortune in not driving much.
So it's a lot more then merely writing code. You need shelter (a place to live) and money for food and rent and utilites and gasoline for the car. Then unexpected bills like speeding tickets, car registration, smog check, and car insurance it all adds up fast and at a frightening pace.
So I don't go insane I visit one of my brothers who's studying for his PhD in CS at UC Santa Cruz and I've promised him a job when he graduates. He thinks in C and Lisp and can write bug free code. He's not human. So I spend money keeping him well fed. So sacrifices need to be made.
And if your site grows you're going to need more
servers and more databases and they run on electricity not oxygen and that costs money.
I would think it would be educational and a good thing for all universities to house startups on campus to study them and learn from them but I agree with PG that it's the founders, dedication, determination and not stubbornness.
There is a lot of uncertainty too. I just visualize the site working and it keeps me going. I watch videos of soldiers in Iraq fighting on YouTube and then I don't mind so much writing code. At least nobody is shooting at me when I'm writing code. And it's good to take breaks and relax sometimes because you need to unplug from the matrix so that
you have a life outside of your code.
Thanks for the informative and inspirational message. I linked to it from http://ploneglenn.blogspot.com/2008/10/where-angels-fear-to-...
You are right. It is all about cost containment in times like this and providing a cheaper alternative is the ticket. That is why I started http://www.dynamicalsoftware.com with its flagship product http://www.code-roller.com whose vision is a marketplace of entrepreneurs, evangelists, experts, and enthusiasts of software development that uses time tested, best-of-breed SDLC deliverables and work flow for a higher quality, faster time to market, yet more affordable alternative to getting custom software done.
You are right. It is all about cost containment in times like this and providing a cheaper alternative is the ticket. That is why I started http://www.dynamicalsoftware.com with its flagship product http://www.code-roller.com whose vision is a marketplace of entrepreneurs, evangelists, experts, and enthusiasts of software development that uses time tested, best-of-breed SDLC deliverables and work flow for a higher quality, faster time to market, yet more affordable alternative to getting custom software done.
Great point. For some more anecdotal evidence, check out the first tech company I worked for:
http://finance.google.ca/finance?chdnp=1&chdd=1&chds...
Immediately after the dot com bust, they were acquiring companies and hiring like crazy. The general pace of the stock market had little to do with how they were performing. It was a bit surprising considering they produce an enterprise software package and you would expect sales to be heavily tied to the market. But they produced a quality product that people wanted, and were able to push the knowledge management/collaboration angle well enough that companies felt like it was an investment they were making.
http://finance.google.ca/finance?chdnp=1&chdd=1&chds...
Immediately after the dot com bust, they were acquiring companies and hiring like crazy. The general pace of the stock market had little to do with how they were performing. It was a bit surprising considering they produce an enterprise software package and you would expect sales to be heavily tied to the market. But they produced a quality product that people wanted, and were able to push the knowledge management/collaboration angle well enough that companies felt like it was an investment they were making.
Yeah, buying on recession is great. But you have to have the cash first. Not exactly a startup situation.
I disagree with comments attacking a money motive. If you don't want to get rich, than do something significant with your life - if you can, then give the money away or help others in some way. And I don't think you really meant greed or you would have said that, and the essay doesn't say go be greedy.
I also agree strongly with the consequences of fear, and how everyone else seems to be cowering in the corner. I am on the tech train and I have it almost entirely to myself. I recently attended some security functions, and it suddenly hit me how this field is begging for innovation. Of all the products and all the big name providers, it was nothing but me-too and do-it-again in a different package. Everyone I talked to from sales to tech, wanted one thing and one thing only - to play it safe and keep their job.
I also agree strongly with the consequences of fear, and how everyone else seems to be cowering in the corner. I am on the tech train and I have it almost entirely to myself. I recently attended some security functions, and it suddenly hit me how this field is begging for innovation. Of all the products and all the big name providers, it was nothing but me-too and do-it-again in a different package. Everyone I talked to from sales to tech, wanted one thing and one thing only - to play it safe and keep their job.
I agree completely. I have done startups before during recessions, and never had any problems because of them. Cofounders are a little harder to find, at least those who listen to the gloomy news and are scared because of it. However, good cofounders are easier to spot during recessions.
Agreed. Recessions flatten the mediocre but reward the great.
Interesting article: Your are absolutely correct about “the state of the economy doesn't matter much either way"---I personally believed that starting up a company in today's economy is an advantage because as you mentioned in your essay there are less competitors in the market place-which makes it easier to growth a business!! Ultimately, before you go into a business –it is necessary to do your research about the market and your competitors, such as, marketplace trends, problems with product and services, how problems can be corrected, get ideas for new products and applications-submit your own questions to discussion groups to get valuable feedbacks- it is up to the business owner to be successful.
Again, Thak you for your article www.empresademercadeo.com
One of the underlying things here is that there is very little use saying 'bad economy' & leaving it at that. Bad what? What are the actual effects.
A startup might be affected by:
Customers/market - These are not necessarily the problem. True. Particularly if you are evolving in this economy, Like a Neanderthal in an ice age. This point is probably neutral on average.
Investors - This may be a problem. This is a market that can shy. But only a problem if you need them. This point is negative.
Buyers- (Of some description) Definitely a negative. But you don't need them right away & you can probably be more flexible waiting for the right time. If Cockaroach doesn't do it.. endospore.
You can't have everything. Comeptitors - A plus. Fewer investors (including founders as the essay implies) by definition means fewer startups.
A startup might be affected by:
Customers/market - These are not necessarily the problem. True. Particularly if you are evolving in this economy, Like a Neanderthal in an ice age. This point is probably neutral on average.
Investors - This may be a problem. This is a market that can shy. But only a problem if you need them. This point is negative.
Buyers- (Of some description) Definitely a negative. But you don't need them right away & you can probably be more flexible waiting for the right time. If Cockaroach doesn't do it.. endospore.
You can't have everything. Comeptitors - A plus. Fewer investors (including founders as the essay implies) by definition means fewer startups.
I agree totally about starting up something in a down economy. It's a great time to test the waters, position yourself for growth and then scale like crazy when the economy thaws. No good surfer ever catches a wave while it's breaking...by that time, it's too late and your eating coral reef. Good surfer bob up and down watching the horizon for the good wave... the big one. They see it before it ever starts to break and they're paddling at just the right time to nail it. Such is the start up entrepreneur in the bad economy. My company, InnoGage, will be able to weather this storm in the higher ed market, but we will be positioned for the global economy when it thaws.
Tom Williams http://blog.innogage.com
Tom Williams http://blog.innogage.com
I don't necessarily think PG is all about making money. In fact in a recent London talk (http://dl.getdropbox.com/u/142733/Audio/Lectures/future_of_w...), he talks more about hackers' freedom. Hackers are animals shackled in corporate zoos, and they need to be freed to express/invent! He also goes on to say, you can even pay them less, as long you provide them the freedom to release their energy!
PG's mantra is a super powerful one: Make something people want, which also translates to 'Create something, make money while making something you love and your customers love'! That's empowering...
I've always found that large competitors tighten up and don't release progressive new products during downturns. At the same time, new/small competitors are reluctant to start. That means there's no better time from a competitive stand-point. Now, investors will be reluctant, but if you are in a position to not need investors (self-financed), then I think it's an optimum time. Once up and running, with products released, the inevitable rising tide of the new economy will float all boats. Continue keeping expenses low and other disciplines ingrained during the downturn, and ride the new tide up.
As usual, wise words. Thanks. ;)
You just reinforced what I have been saying to people about what I'm doing as a one-man startup with phreadz.com in these tough, cold times.
People are out there building, or trying to build solutions to problems I have already solved on my own. So, now I can save them a whole lot of time and money by providing a solution for them right now. Hopefully this will help get them where they want/need to be without over-spending.
Also, the fact that investors and clients will get a good deal now, if they jump on board now is a good thing, so we can all reap the benefits on the up-swing.
Thanks for yet another great article.
Kosso Founder : Phreadz.com
You just reinforced what I have been saying to people about what I'm doing as a one-man startup with phreadz.com in these tough, cold times.
People are out there building, or trying to build solutions to problems I have already solved on my own. So, now I can save them a whole lot of time and money by providing a solution for them right now. Hopefully this will help get them where they want/need to be without over-spending.
Also, the fact that investors and clients will get a good deal now, if they jump on board now is a good thing, so we can all reap the benefits on the up-swing.
Thanks for yet another great article.
Kosso Founder : Phreadz.com
I like how when PG writes an article, there about about double or triple the comments on hackernews compared to any other random submission.
The line I found most valuable, is the reason I first decided to start a company. 'Markets don't "reduce headcount."' the most security you can have is working for yourself... or the government... but I think most of the "startup types" dread the idea of the bureaucracy. We like the freedom to rise or fall based on our own abilities, the freedom to make something that is going to change the world. The majority of hackers I know are revolutionaries, not reformers.
The line I found most valuable, is the reason I first decided to start a company. 'Markets don't "reduce headcount."' the most security you can have is working for yourself... or the government... but I think most of the "startup types" dread the idea of the bureaucracy. We like the freedom to rise or fall based on our own abilities, the freedom to make something that is going to change the world. The majority of hackers I know are revolutionaries, not reformers.
Paul, I think you are wrong with that one.
Who would lend NOW a bunch of (IT) guys money for a startup. A bank ?!?! No! Rather the mob.
The reason why Viaweb/MS/Apple were succesfull is that they invented / did stuff that didn't existed at that point. You /They created a market where there was none. Back in these days there was a small amount of technology and a small group of people who understood it. Nowadays it's much tougher with competition from anywhere and anyone has access to loads of information and technology.
Regards, Anes
Interesting read...I just found an interview of a CEO of a business development firm who say the economy is BS. And in fact, it is not only a good time, but the BEST time, to start a business in a rough economy. You can call BS on his opinion even here: http://downtobusiness.com/bs-meter/start-business-bad-econom...
pg: i agree once again.
the exogenous nature of technological progress has always been independent of GDP growth. When the economy grows and consumption is booming, tech firms and start-up founders benefit yes, but then it's like waiting for a sunny day to go for a walk.
You could go for a walk any day and get the same benefits: exercise and sight-seeing. In fact, too much sun might hurt you but you could always learn to get creative against wind/rain (coat and umbrella).
I guess what I'm saying here in case you're lost is that a recession is bad weather than need not distract tech start-ups from flexing their muscles. If you could make it in bad weather, chances are, you could enjoy more success in the sunny weather!
I don't want to say I agree that one has to launch a start-up during recessions only. Obviously, the most ideal time to start one is to know you can make decent money and a product that solves an important problem, be it in a good or bad economy, because, statistically, recessions are shorter and milder than before and expansions longer.
In the end, it is not a question of when, even. It remains a question of how.
the exogenous nature of technological progress has always been independent of GDP growth. When the economy grows and consumption is booming, tech firms and start-up founders benefit yes, but then it's like waiting for a sunny day to go for a walk.
You could go for a walk any day and get the same benefits: exercise and sight-seeing. In fact, too much sun might hurt you but you could always learn to get creative against wind/rain (coat and umbrella).
I guess what I'm saying here in case you're lost is that a recession is bad weather than need not distract tech start-ups from flexing their muscles. If you could make it in bad weather, chances are, you could enjoy more success in the sunny weather!
I don't want to say I agree that one has to launch a start-up during recessions only. Obviously, the most ideal time to start one is to know you can make decent money and a product that solves an important problem, be it in a good or bad economy, because, statistically, recessions are shorter and milder than before and expansions longer.
In the end, it is not a question of when, even. It remains a question of how.
Exactly one of the following is true:
(1) The probability of success is equal whether you start a startup in a good or a bad economy.
(2) The probability of success is greater if you start a startup in a good economy.
(3) The probability of success is greater if you start a startup in a bad economy.
This latest essay is a bit ambiguous as to whether it's defending (1), (3), or (2)-but-not-by-much. Which is it?
(1) The probability of success is equal whether you start a startup in a good or a bad economy.
(2) The probability of success is greater if you start a startup in a good economy.
(3) The probability of success is greater if you start a startup in a bad economy.
This latest essay is a bit ambiguous as to whether it's defending (1), (3), or (2)-but-not-by-much. Which is it?
I think this is spot-on Mr G. I wrote a similar blog recently, although targeted more broadly than just IT: http://www.aliveworld.com/members/pengo01/blog/archive/2008/...
Very timely. And it's great to read a "glass half full" approach with some keen insight and advice.
We're certainly planning on your main thrust to be true with our new platform. To that point - here's our latest blog post: http://tinyurl.com/6blrvl
Potential investors welcome!
We're certainly planning on your main thrust to be true with our new platform. To that point - here's our latest blog post: http://tinyurl.com/6blrvl
Potential investors welcome!
I agree. Startups that start now and are able to come out strong after the recession would have proved their mettle and hence will be successful. Also, this is the right time to form a strong team, coz most of the good hackers are looking for something interesting to work on (less competition).
My suggestion is to be sure to advertise and push your project especially hard when your competitors are dropping like flies. If you mearly hang on you will come out the other end with a whole new slate of competitors that will be funded so you need to be in a strong position to take them on.
One things that helps too is that in recession time large companies have no available resource to stomp you out of existence. They're fighting to survive, cutting jobs and getting completely disorganized, and no one realizes there's a little guy out there who's stealing markets and clients.
These times are great and many of us are loving the recession. For some ideas how to startups should take this positively, see http://kaljundi.com/2008/10/28/10-reasons-startups-love-rece...
Very good article. I was wondering if this is actually a good time to start some sort of business or not and I stumbled on this article by accident. It is good to be optimistic and on the positive side of what is in the news than being discouraged. I command you for your good advise.
In a bad economy, companies are busy trimming expenses and cutting staff. Finding a job is like finding a needle in a haystack. Why not start a start-up? If you are rolling down a mountain in a car that has no brakes, wouldn't you prefer to be the one behind the wheel? I would.
The blog seems to depict a case in hand I have with my project. Paul Graham should see what I am working on these days. Only thing is, as much as I need a VC partnership, I am slowly clearing free of having one due to the skill and the little financial support I already have.
Exactly my sentiments. Well said. Maybe you will like this video I made to express my sentiments.
http://sanjaydattatri.blogspot.com/2008/10/its-not-all-doom-...
I am of the same opinion. You may want to check out my new book, Entrepreneur Journeys (Volume One):
http://www.sramanamitra.com/2008/09/09/entrepreneur-journeys...
Sramana
Sramana
> The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies.
Eh? Every expert I've heard lately is fearful we're headed towards a repeat of the great depression. The one during the 1930s... not the 1970s.
Eh? Every expert I've heard lately is fearful we're headed towards a repeat of the great depression. The one during the 1930s... not the 1970s.
I'm not sure I follow that bad times being a good time to invest means that its a good time to start a company. Investors want a low price, but for founders I would have thought the amount of effort (price paid) is fairly much independent of the economy.
Opportunity costs are lower.
If the economy were good, the opportunity cost of building a startup would be a high paying job as a quant.
Since it's bad, all I'm missing out on is a shot at postdoc #2 or a faculty position.
If the economy were good, the opportunity cost of building a startup would be a high paying job as a quant.
Since it's bad, all I'm missing out on is a shot at postdoc #2 or a faculty position.
Wow, way to call me out just as I am preparing for the GREs and grad school applications. In my defense, I've previously wanted to go to grad school also, and even then, because I wanted to meet more people that would be potentially good cofounders.
The cofounder issue is also why I'm not starting another company (yet). I thought about going to grad school, but now am looking more towards getting a job at one of the big tech companies in the Valley. That at least will get me into the right geographic area, and with any luck I'll find some smart coworkers or friends there.
Exactly, I also feel so and have written a blog on it http://barakbangla.com/index.php/Is-it-good-time-for-entrepr...
Starting up a tech company in lean times is certaintly different from any other business whose products are tangible. The startup and operational costs are much lower and surely, making wise choices the startup can outperform competitors.
"The cheaper your company is to operate, the harder it is to kill."
That's one of the most bad ass business quotes I've heard in 2008. Nice PG!
(btw, I started a new company this year and would add that it's much easier to hire GREAT people in these types of markets.)
That's one of the most bad ass business quotes I've heard in 2008. Nice PG!
(btw, I started a new company this year and would add that it's much easier to hire GREAT people in these types of markets.)
In my eyes an important factor is the psychological one where as an entrepreneur the ideas you have and the way you shape them tend to be more realistic in bad times then in hype times. I guess it is something of the survival nature.
Dudu
Dudu
I wrote my 2 cents before seeing PG's $2
http://www.pollenizer.com/?p=25
And as Chris Hitchen from Getprice.com.au said the other day;
"A recession? Is that when a user comes back to your site again and again?"
http://www.pollenizer.com/?p=25
And as Chris Hitchen from Getprice.com.au said the other day;
"A recession? Is that when a user comes back to your site again and again?"
Good article with few wisdoms.
It is all about mind over matter.... good or bad.... A positive minds looks at problems as opportunities and other mind vice versa...
As you mentioned the success or failure depends on founders rather than outside....
It is all about mind over matter.... good or bad.... A positive minds looks at problems as opportunities and other mind vice versa...
As you mentioned the success or failure depends on founders rather than outside....
Thank God, finally some reason in the room. Run lean + create value + Targeted marketing = Success = MarkTend.com
We were ahead of the curve on this one.
Michael Kassing MarkTend.com http://marktend.com
We were ahead of the curve on this one.
Michael Kassing MarkTend.com http://marktend.com
If I would develop something that could help people with their education, it should probably be recession-proof. Also, while US may suffer recession, some other countries probably still enjoy economic growth.
Chinese translation: http://www.ruanyifeng.com/blog/2008/12/why_to_start_a_startu...
Great post Paul. There will always be room for good ideas that actually solve problems. If you position the start-up now, it will be ready to reap even greater rewards as the economy recovers.
I completely agree. I cant wait to outwork everyone in this market. I have a feeling that this is the time when the brave, bold and smart rise to the top and that is fully what I intend to do.
Thanks PG. I've have the same idea about this economy problem and startup. This article gives me to lots of passion! I'll send this link to all of my co-workers.
p.s. Can I translate this article to korean?
p.s. Can I translate this article to korean?
Thank you, Paul! Russian translation here:
http://www.web30.ru/2008/12/04/zachem-zapuskat-startap-v-kri...
http://www.web30.ru/2008/12/04/zachem-zapuskat-startap-v-kri...
Russian translation http://spring.jumpidea.com/2008/10/paul-graham-badeconomy.ht...
Very, very, interesting! Is it only about making money though? Sure that is essential, but what about the journey we take along the way? That is where the wealth lies.
[deleted]
There is about to be a whole raft of federal packages for small plumbing companies; that is the real reason to get started. Apparently you don't even need a license.
[deleted]
Good enough article, especially for "one step before" entrepreneurs.
Fabian http://cupofstartup.blogspot.com/
Fabian http://cupofstartup.blogspot.com/
This is off topic, but this seems to be something PG would be interested in. I would like to see his take on the idea.
www.overcomingbias.com/2008/11/fund-ubertool.html
www.overcomingbias.com/2008/11/fund-ubertool.html
excellent points!
One thing I would like to add: In India, during booming times one problem startups face is finding good people at affordable rates. The demand supply equation is so bad that someone with 2 years experience in any sort of hacking will land a job that pays x+n where x is the current pay and n substantial percentage of it. Now in tougher times people would be willing to join and also stick around.
One thing I would like to add: In India, during booming times one problem startups face is finding good people at affordable rates. The demand supply equation is so bad that someone with 2 years experience in any sort of hacking will land a job that pays x+n where x is the current pay and n substantial percentage of it. Now in tougher times people would be willing to join and also stick around.
pg - once again - you're right on - i might add though that passion is also an ingredient that founders need to survive a nuclear winter - if you don't love what you do or love what you are building you wont survive the best of times and you're doomed at the worst of times as every passing day will test your will power to stick with it and make it happen whether its sunny outside or raining fire.
I did quit my day job and decide to pursue my long-time goal of building a startup vs. getting a grad degree. Great article.
Very refreshing and rational. Thanks PG!
As someone who quit my job 4 months ago to co-found my first startup (not funded yet), this essay is chicken soup.
Thanks PG.
Thanks PG.
Are many of the startups by yc the viaweb sort? Free lisp on free unix with no relational database?
These are the best of times.. these are the worst of times..
For sure, these are not average times.. :)
Thanks Pg, keeps our spirit going!
For sure, these are not average times.. :)
Thanks Pg, keeps our spirit going!
of many examples, Sony (created after WW II in a bombed building) reminds me of how great innovators are not affected by transient disasters. I guess we should feel lucky that we only face economic crisis, and not the terrible destruction the world has faced before :)
Well now, we are in a Bad economy for the first time in History in the whole world.
As bad as the mid '70s? The commentators I'm reading are talking about the '30s.
heh, as a self educated hacker from mississippi, with over 12 startups under my belt, you talk a lot of sense...
(8 dismal failures, twice wealthy, once almost made the rainbow)...
keep it up...
you're almost my hero... :-)
(really hard to beat out my father :-)
(8 dismal failures, twice wealthy, once almost made the rainbow)...
keep it up...
you're almost my hero... :-)
(really hard to beat out my father :-)
Great Article...
Working on a site web2.0fuckedcompany.com if you want to help....
Working on a site web2.0fuckedcompany.com if you want to help....
I wonna help
Russian translation of this essay is <a href="http://k-vladimir.blogspot.com/2008/11/blog-post.html">here</a>.
Paul, a timely and encouraging article, thanks.
- Varun www.homecamera.com
- Varun www.homecamera.com
nice artcile that gives inspiration to people like us to venture into startups at these difficult times! really an insightful one!
could it also be that the cloud gang saw this coming?
or just as you (pg) say - tech, stocks are not strongly interdependent
What does
"Technology trains leave the station at regular intervals"
mean?
"Technology trains leave the station at regular intervals"
mean?
the thoughts are very much in synch with what my mind revolves for the past few weeks. Nice indeed.
Thats exactly what i have done
www.abhayatech.com
www.abhayatech.com
Thanks for a very good post.
looking for investors..... interested?
myteev.blogspot.com
myteev.blogspot.com
The poverty part about a startup is true. To save money I bought a mountain bike and soon afterwards sprained my ankle so I couldn't ride my bike (to save on gas money) and then I caught the flu and I've been down for the count for 2 weeks recovering and didn't have the strength to pedal.
Little things like comcast bills and tmobile bills add up.
Starbucks adds up but that's the only place next to Cafe Borrone that I brainstorm and relax enough to write code and design web pages and mess around with ColdFusion8. None of my great ideas came to me in my apartment. They all happened while sitting in a cafe relaxing. My neighbors at my apartment complex are not american and not programmers but they do seem to have a keen interest in bad loud music and burning out with their cars in the parking lot.
Founders At Work is a good book and a good read but another book I'd like Livingston to write is about failed startups.
Also, a lot of the stories in the book are software projects and not true startups. In a startup you have to embrace failure and change and headaches and it's a demon of a roller coaster. So though it's a startup I still have costs like car insurance, gasoline, food costs, 1,100 a month rent, utilities for electricity. I have a programmer executive chair, a desk from Scandinavian designs and a camping air mattress from REI and a sleeping bag and blankets and great pillow from Bed Bath & Beyond. Shopping at Costco is recommended rather than Safeway or Longs Drugs to save money. So starting a startup doesn't take into account the 3,500 I shelled out for a Macbook Pro (which I bought thinking I was going to become a teacher) and I do use a wind up flashlight from REI for light but I'll switch over to candles soon. Cutting costs is the name of the game.
But finding dedicated programmers is the key to victory.
I don't recommend anyone start a startup by themselves because there is so much you have to think about and get feedback from friends. I changed the entire design of my site just a week ago and writing requirements is a pain but a necessary pain. Also, milestones work. It's easier to tackle one pebble at a time rather then a whole boulder which is just too overwhelming. Daily progress and weekly progress is the only way it will work.
Also, I have recruited many of my friends to help out when the site launches in terms of testing, and accounting, and customer service and they're all going to work for free but none of my friends are coders. Everyone I used to know that wrote code doesn't write code anymore. They either got carpal tunnel or just cut coding cold turkey.
Having money is key. I'm funding this startup with my inheritance but if I don't get funding or the site isn't making enough dough by Valentines day the site will crash and burn and then I'll have to sell my car and I don't want to do that. I sold my car for my first startup and that was the biggest mistake I made in my entire life. Life is much more difficult without a car.
Having money is key. I'm funding this startup with my inheritance but if I don't get funding or the site isn't making enough dough by Valentines day the site will crash and burn and then I'll have to sell my car and I don't want to do that. I sold my car for my first startup and that was the biggest mistake I made in my entire life. Life is much more difficult without a car.
What about having savings instead of "investor funding" ? If you have developed a great product why in the world would you like to share your company with VCs anyway ? Why you need somebody to invest in your company ? I mean come on people, you can save $10k in vacation as a college student waiting tables and have 100% pie for yourself. I don't understand the logic here. Never did.
Not everything is yet cheap enough to run on 10-50k of savings. Take semiconductors for example.
Some software technologies are also quite expensive to develop, not everybody is doing web apps, thanks God :-)
you are absolutely right, my friend. i'm starting up right now, and am looking forward to the challenge.
One thing that worries me personally about starting the "stereotypical" HN startup right now, is that I think the free/fremium model is going to lose steam FAST. My prediction is that you will see more companies trying to start monetizing their web-app soon. FWIW, TipJoy is well positioned to take advantage of this if my prediction is true.
Of course, I've always been a hardware/product startup hacker, but I've had a couple of rounds in software and Web 2.0 companies. So, I'm not as immersed in web-app funding cycles as some others here are.
I would look to solar and certain other viable alternative energy options right now as the next major tech growth sector. I think the tech startup world needs to see more "inventions" (again, admitting my own bias).
While many here may disagree with me, one of the problems with web-apps is that while they are cheap to get going (relatively speaking), I think that the saturation of non-revenue producing web-app companies, coupled with the low cost of starting them, will make many traditional VCs look elsewhere for their next investments. The web-app community needs more investors like YC, that keep the investments and process realistic.