6 ms·

Ask PG: Correlation between frugality and startup success?

48 points by hooande 18y ago

Have you seen any relationship between the amount of money a YCombinator company spends over the summer/winter and their eventual success? I would guess that it's bad for a startup to blow through their investment money, but how big of a factor is day to day frugality for a startup?

redorb 18y ago
when the investment is micro (10-15k) I suspect (as said in their documents) that Ycombinator doesn't even keep track of where the money goes.
- SwellJoe 18y ago
  YC doesn't keep track of anything, except the people involved (and even that is optional).
webwright 18y ago
Yeah, they didn't once ask us where we spent the money. I think the assumption is "food, rent and hosting".
- fallentimes 18y ago
  How does this work come tax time? From my understanding, you can only write off hosting, half of food (sometimes) and maybe a part of rent. How did you guys deal with this?
  - SwellJoe 18y ago
    I don't know that we're representative, but, so far, I mostly just wave my hands around and go, "This sucks." And then leave it for later (meaning we haven't been doing much with write-offs or expenses on our tax filings). Pretty much all of my bookkeeping to date has been of the form "put it in a folder for when we hire a bookkeeper". Luckily, this will be the year in which we hire a bookkeeper, and I won't have to think about it too much any more, and I most likely won't end up in jail for not reporting things correctly or on time (fingers crossed).
    - jdavid 18y ago
      on a failed startup of mine, i redid my taxes 3 years after i closed the company. i received $25k as a refund, and it cost me $4k for the accounting. good accounting is WORTH IT. had i used that firm in the first place i might have saved an additional $50k and spent $4k on fiscal advice. Since i self funded i did a lot of stupid things when it came to managing cash flow and spending personally for my company. also for being able to better leverage credit vs opportunity cost on selling stocks and paying employees, i could have much better used my available margin trading ability that had an interest cost of only 5%, and with some stocks, waiting till the fiscal reports would have been worth 20%, which would have kept me in the black personally, vs. having a burn rate. oh the things i would do differently, and well, the things i am doing differently with social helix.
maxklein 18y ago
Frugality is useful, but so many people who are tight with money tend to underestimate the cost of time. Or the cost of friendship when you refuse to pay your share. Or the cost of a bad impression when your clothes look old. Be careful with money, but be careful to also spend money.
pg 18y ago
Good question. There is a huge correlation. People who are cheap are much more likely to succeed. And not just because their money lasts longer; a frugal attitude seems to correlate with success.
- johns 18y ago
  Any thoughts on why this is? My first thought is those that are frugal understand the long-term consequences of their decisions, understand the fragility of their position and are otherwise more measured decision makers. All qualities which I think translate well to running a successful business.
  - SwellJoe 18y ago
    Frugality is just a basic life skill. It serves you well in anything. However, I'm beginning to notice now that our customer base has grown and our revenues have doubled a couple of times over since our time in YC that what used to seem extravagant (paying people to do things for us) is now becoming the smartest way to make problems go away. I just paid Google $500 yesterday to handle search on our site, because it is a problem that has effected me on a couple of occasions, and I decided that even one more day of me fighting with full text search in MySQL and PHP (which is not a comfortable language for me to work in, as I use Perl mostly) was one day too many--the opportunity cost was just too high, when that one day spent talking to customers could close a deal worth many times the $500/year that I pay for Google Custom Search. But, that's frugality of another kind (one that considers the value of both time and money), of course, so it doesn't invalidate the idea that frugality is pretty much always a net win. I just thought it worth mentioning since I've seen plenty of entrepreneurs take frugality too far. Colocating their own box instead of renting a server in order to save $10/month, for example...if you have a single hardware problem during the 18-36 months that the server is in service you end up with a raw deal (because you either have to go to the colo and deal with it, or hire the colo service folks at $100/hour to deal with it). If it's not the focus of your business, try to find someone else who does have that as their focus to do it for you. Work on your differentiating factors, not the day-to-day crap that every business has to have.
jbyers 18y ago
As a startup, the more you constrain your target audience, how feature-heavy your product is, and how much money you spend building it, the more likely you are to find a market you can succeed in -- or fail quickly. Both are positive outcomes. But, you have to value your time properly. Otherwise your perception of being frugal is really just an accounting error. Our competitors outspend us by orders of magnitude. But we've been frugal and focused. So while they're worried about raising their series X and lining up an exit, we're worried about serving our customers better and how to spend our profits. I wouldn't want to switch places.
melvinram 18y ago
As long as you're not being "penny wise and dollar foolish", you're better off. If you loose time/friendships/customers/reputation (as others have mentioned) by saving money, you might be being dollar foolish.
dhouston 18y ago
like anything else, it's a matter of balance. i used to be a hardcore bootstrapper and would pride myself on getting something to market on a $x,000 budget, or saving a few bucks on an SSL certificate, laptop, office space, tax deductions, etc. but the result is i'd waste a lot of time and emotional energy on shit that didn't really matter to our core business. but there are two things to remember: - your time is a lot more valuable than you think (as others have pointed out) - often money, wisely allocated, (i.e. hiring a couple engineers or investing in a good work environment, not all-around extravagant spending) can help you get to market and achieve your goals faster and since speed is a startup's only real advantage, this is often the difference between a 1 or 0 outcome.
abijlani 18y ago
Frugality makes you creative. If you think you have abundant resources then you will always throw money at the problem. Whereas if you feel your resources are limited then it will force you to come up with creative solutions to make the most out of what you have.
chris123 18y ago
Definitely good to hear. I am very frugal too. One of my blog postings on the topic: http://buzzpal.wordpress.com/2008/02/17/bootstrap-then-raise-funds-ifwhen-necessary/ http://buzzpal.wordpress.com/2008/02/17/bootstrap-then-raise...
Mistone 18y ago
YC is frugal with their investments - they give companies just enough to survive, which motivates the founders to be as frugal as possible.

xlnt 18y ago

Maybe this is because excessive spending is caused by not thinking carefully and precisely about all the factors relevant to the startup, whereas frugality comes from trying to maximize everything to one's benefit. So even if the actual money savings doesn't make a huge difference, it's a visible indicator of doing the right kinds of things.

pg 18y ago
That is definitely a large part of it. When Greg Mcadoo from Sequoia spoke at YC this winter, he said he'd also noticed that frugal startups did better. When I asked him why, he said probably because frugality was an instance of focus, and that focus is the key to success in a startup. Overspending = spending on inessential things, which in turn implies you don't understand what's essential. For the same reason, it's bad when founders can't explain what they're doing concisely.
manmanic 18y ago
I've think there are a couple of hidden factors which help explain the correlation between frugality and startup success - economic intuition, and the sense of entitlement. Many startup founders don't have good economic intuition, and this expresses itself both in a lack of frugality, and an inability to come up with a realistic business model. In other words, similar skills and experience are needed to answer both these questions: 1. How long do we need our investment money to last, and what is the best way of spending it over that time? 2. What kind of products will people will pay for, and how much will they be willing to pay? So you'll often see a startup which is spending money unnecessarily, and also finding it impossible to bring enough in. On the second point, some startup founders have a sense of 'entitlement'. By this I mean a belief that the world owes them a good life without them having to earn it. Perhaps this is because investment is too easy to come by in the current environment. Instead of feeling a heavy sense of responsibility and guardianship over their investors' money, and focusing on providing a return, these founders think they've been given a free ticket to go pursue their dreams. This will express itself both in a lack of frugality regarding money, and also an unwillingness to put in the long hours necessary to make their startup succeed.