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Before the Startup

paulgraham.com

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Re: Before the Startup

#121

Post by adrianhoward »

strlen wrote: post #120
adrianhoward wrote: post #56

Earlier quoted context omitted.

"How do you bootstrap a company that requires significant R&D before an MVP can be shipped? Or for that matter one that has initial infrastructure costs, or one would only be affordable if there's an economy of scale?" You can't — obviously. And folk like Amy Hoy @patio11 freely admit that. The key word there though is "requires". I've encountered lots of companies that have spent silly amounts of money, often their…

Interesting answer, thank you for writing it. As an armchair quarterback I'm a bit surprised about what you've said about "folks with a dev background" (if I didn't focus on distributed systems, I'd likely focus on development tools/services -- and there are tons of bootstrapped companies in that area), but I'll take your word for it.

Sorry — I didn't mean to imply that dev folk don't bootstrap!

What I meant, and expressed poorly, was that dev-ish folk tend to not have some of practices in their toolbox that you can use to validate cheaply (e.g. by knowing how to assess markets well, or knowing how to interview potential customers in a non-directive way, or indeed the ability to talk to customers at all, etc).

We also have a tendency to want to build things because, y'know, that's what we do ;-) We also tend to want to build things really, really well for that awesome future place where we have millions of users. So we over-engineer for where we are now, and the learning we need now.

Because of both of these issues I think folk with a dev background find themselves in a position where VC is the only route forward — when if they'd taken a different approach earlier on they could have continued bootstrapping and avoided VC money until later / forever.

Does that make sense?

Re: Before the Startup

#122

Post by rokhayakebe »

strlen wrote: post #116
rokhayakebe wrote: post #101

Earlier quoted context omitted.

Are you under the impression that most interesting R&D is done at venture-backed startups? What about universities and government funded projects? Are you also under the impression that most interesting R&D need significant funding?

Getting university and government grants requires a great deal of gaming the system. I'd say governments and academia also attract gamers of the system moreso than startup world (indeed, that is a point that pg makes). I can't speak of "most interesting", I can only speak of what I've worked on :-)

What have you worked on that could not have been done without VC backing?

Re: Before the Startup

#123

Post by beachstartup »

soundlab wrote: post #118
IsaacL wrote: post #47

So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. [2] But that doesn't work with startups. There is no boss to trick, on…

I think one of the distinctions is that for bootstrapping you can start with something (very) small and end with something big over a long period of time. Whereas when you take on venture capital the expectation is to build something very big very fast. The latter requires more capital to expedite the ROI for the VC whereas the former is typically a much slower, organic process that may not reach an equivalent scale…

> you can walk into a commercial bank (gasp!) and setup revolving lines of credit or expansion capital to fund more growth.

commercial banks are incredibly hesitant to do this even if you've passed the magical 5 year mark. their commercials loans are underwritten by people who are extremely risk averse, and the "commercial bankers" at your local branch are basically the people who aren't good enough for investment banking i.e. the b-stringers who don't understand how a technology business works. they'll just say no. in fact, it's their job to say no. i have my doubts as to how much money they even make with their loans. most of their revenue comes from fees these days.

however - there are thousands of specialized finance firms who will gladly help you, because there is a massive hole in the middle of the money market for these kinds of funds. they will provide you with:

* revolving lines of credit

* commercial equipment leases

* straight up loans

* special insurance

* lots of other industry-specific stuff that a bank just doesn't even know exists

this entire industry has sprang up "overnight" in the past 10 years - the vast, vast majority of new businesses in america are bootstrapped (think restaurant, construction company, small accounting firm, small scale manufacturing/machining, software companies, etc). venture capital and large banks are not involved. this isn't their game. it's "main street".

these specialized firms generally specialize in an industry i.e. construction, technology, food service, etc. and will know at a glance if your business is healthy or not. and don't worry - they'll find you. they have a knack for swooping in at exactly the right time. they also will not require a personal guarantee, which is a huge leg up on the banks, who will make you sign at least 2 or 3 documents saying they own your life.

if you ask me, commercial banks are nearly useless for anything but checking accounts and wire transfers. they're run by morons, or at least people who don't give a damn about technology businesses, which is tantamount to being a moron in the 21st century.

Re: Before the Startup

#124

Post by pchristensen »

patio11 wrote: post #105
IsaacL wrote: post #47

So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. [2] But that doesn't work with startups. There is no boss to trick, on…

I think you may be attributing to me some things which I don't recall having written.

IIRC, you've said things more along the lines of "VC interests are often not aligned with founders' interests" and "VC funding isn't really my cup of tea". Amy Hoy and 37signals/Basecamp are the ones who ardently speak out against VC funding as a business strategy.

Re: Before the Startup

#125

Post by silverbax88 »

beachstartup wrote: post #123
soundlab wrote: post #118

Earlier quoted context omitted.

I think one of the distinctions is that for bootstrapping you can start with something (very) small and end with something big over a long period of time. Whereas when you take on venture capital the expectation is to build something very big very fast. The latter requires more capital to expedite the ROI for the VC whereas the former is typically a much slower, organic process that may not reach an equivalent scale…

> you can walk into a commercial bank (gasp!) and setup revolving lines of credit or expansion capital to fund more growth. commercial banks are incredibly hesitant to do this even if you've passed the magical 5 year mark. their commercials loans are underwritten by people who are extremely risk averse, and the "commercial bankers" at your local branch are basically the people who aren't good enough for investment ba…

I really appreciate what you've laid out here and honestly would like to know more about it, both as a bootstrapper and as an investor.

Re: Before the Startup

#126

Post by alain94040 »

strlen wrote: post #52
IsaacL wrote: post #47

So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. [2] But that doesn't work with startups. There is no boss to trick, on…

How do you bootstrap a company that requires significant R&D before an MVP can be shipped? Or for that matter one that has initial infrastructure costs, or one would only be affordable if there's an economy of scale? This is armchair quarterbacking, of course, I'm not an entrepreneur and do not pretend to be one. Patio11 has a lot of interesting and relevant things to say, but I would hate to live in a world where en…

How do you bootstrap a company that requires significant R&D before an MVP can be shipped

It's hard but possible. Your team could do consulting on the side to pay for the R&D. A hardware company I am very familiar with did this for 2 years and skipped all seed funding, to build a highly complex and expensive hardware product. It was succesful.

Re: Before the Startup

#127

Post by hristov »

Great essay! It makes me feel good to know that random curiosity may prove to be a good thing somehow. Alas, I am much older than his intended audience.

And as a proof of being old I would like to congratulate Paul Graham for being one of the very few people in the world to actually use the "begging the question" phrase correctly.

Re: Before the Startup

#128

Post by happyscrappy »

IsaacL wrote: post #47

So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. [2] But that doesn't work with startups. There is no boss to trick, on…

>You have to make something people want, and you prosper only to the extent you do.

This is necessary but unfortunately not sufficient. You still have to do all the sales and marketing grunt work. It is amazingly hard to get people to pay money even if they love your product. Brutal and depressing.

Re: Before the Startup

#129

Post by IsaacL »

patio11 wrote: post #105
IsaacL wrote: post #47

So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. [2] But that doesn't work with startups. There is no boss to trick, on…

I think you may be attributing to me some things which I don't recall having written.

Sorry. As my sibling poster pointed out, I think I mixed you up with other pro-bootstrap/anti-VC writers.

Re: Before the Startup

#130

Post by silverbax88 »

ak39 wrote: post #72
Ma8ee wrote: post #70

Earlier quoted context omitted.

The important distinction is between what people want and what people are prepared to pay for. So when your startup is making something people want, but few are prepared to pay for, you can get a massive user base that make it look like you have a very solid startup which you manage to sell for huge amounts of money, while the company only has a tiny chance to ever make a profit. Then you have gamed the system.

Are there any good examples of startups creating a "massive user base" but not making any money? The likes of WhatsApp were valued significantly higher than the readings of their cash flows would convey. So such examples of massive valuations in spite of zero or negligible cash flow are not good examples.

Probably not an exact match, but until Twitter shows a profit, it would fall into this category. It has millions of users but tiny amounts of revenue, yet did a big IPO and is valued at an incredibly-hard-to-justify share price.

I mean, there are insurance and retail stocks that have billions in revenue, showing serious profit each quarter and their share price is half of Twitter's. But, to be fair, Twitter didn't 'growth hack', they did build something people wanted to use. But their exit (as of now) would have to be considered 'gaming the system'.

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