7 ms·

Throw out that five-year plan, build something now, and don't take any money

59 points by terpua 18y ago

pg 18y ago
"Taking money from someone else kills more start-ups than anything else does." Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products.
- tptacek 18y ago
  Overfunding is what causes lots of companies to build lame products.
  - pg 18y ago
    Not lots. Only a tiny fraction of startups have the luxury of being overfunded. Most are underfunded. And poor startups produce lame products at at least the rate that rich ones do. Therefore overfunding is responsible for at most a tiny fraction of lame products.
    - tptacek 18y ago
      That might be true in consumer web products. I wouldn't know. But it's wrong in enterprise IT products. Venture funding pushes people towards rube goldberg contraptions that overcome "defensibility" hurdles by sounding unlike anything else on the market and, not coincidentally, unlike anything anyone would want to buy. You want a good example? Procket.
      - shawndrost 18y ago
        In enterprise IT, the buyer isn't the user, and purchasing decisions are based on many factors besides quality of the software. It's unrealistic to blame all of that on VC funding.
        tptacek 18y ago
        This is a myth about enterprise IT products. I'm calling the whole space "enterprise", because that's what Graham would call it, but we're talking about all products that sell for over the ~$60k to justify direct sales. That may include crazy stuff like SAP or PeopleSoft --- ew --- but it also includes Splunk and Palo Alto Networks and pretty much every security products. The buyer is the user for almost all of these products. Quality is very much an issue, although it's again stunted by VC.
- cperciva 18y ago
  Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products. I think their point is that those factors are related. If someone gives you a huge pile of cash, there's a temptation to answer any criticism with "you think it's lame now, but just wait -- once we're done you'll love it". If you don't have a lot of money, you can't use that excuse -- you have to build something which people want from the start.
  - tptacek 18y ago
    VC will also often refuse to allow you to build simple products, or products that already exist in the market, or to go to market with a product that does not have a hockey stick projection behind it.
    - webwright 18y ago
      in a settting like 37s is talking about, funding probably means seed/angel funding. How much control/influence do you think these types of investors have? They have a minority stake, rarely have a board seat, etc. It's easy/popular to blame bad products on investors, but usually that's pretty unfair. I think (at the seed stage) it's usually due to the founders. I think better advice might be "don't take so much money that you have to give up early control." It seems to me that a well-run angel funded startup will get to market quicker and have a slightly bigger (and potentially quicker) exit if the founders play their cards right. So you trade a small minority stake for getting "there" (wherever there is) months or years sooner as well as having a slightly better shot at a win due to investor influence. This all assumes a goal of eventual liquidity, of course.
      - fallentimes 18y ago
        Did Rescuetime take angel funding?
        tptacek 18y ago
        YC.
- jkent 18y ago
  What about lame people as the most common reason for failure (who also build lame products, with lame execution) ?
smoody 18y ago
this comes from a company that took money. granted it was from mr. bezos, but still.
- johns 18y ago
  To be fair, they had already built something people wanted first.
- tptacek 18y ago
  They had mid-millions/yr in revenue when that happened. They had already won.
- pchristensen 18y ago
  They've said multiple times that the main reason was to get access to Bezos. They didn't need his money, they wanted the man.
  - echair 18y ago
    they wanted the man And to cash out individually, I suspect.
  - anewaccountname 18y ago
    Then why did he have to pay them money? I'm sure he would have taken a stake for free.
    - pchristensen 18y ago
      That would have unfortunately valued his stake at $0.
vaksel 18y ago
That may have worked before, but with web 2.0, you have millions of startups that need the money to afford the hosting costs.
- tptacek 18y ago
  If your startup idea incurs large hosting costs before taking revenue, modify the idea.
- fallentimes 18y ago
  Yeah you can get a boat load of hosting for $500 per month or less. And the following is a great pitch to a VC: "we're getting too much traffic, and I can't afford the hosting - will you invest in me?"
- lsc 18y ago
  Wait, what? ec2, (I consider them my biggest competitor, they probably don't know I exist, and, well, my product is somewhat different) has lowered the cost of hosting dramatically. and there are places that are even cheaper than that (such as my company) - unless you are doing something like video sharing, hosting costs are simply not a huge deal anymore compared to programmer time. At what I bill out for as a contractor, for every hour of my time, you can run a amazon ec2 small node for a month and have enough left over for a cheap lunch. At most (USian, at least) startups, pizza for the meetings should cost more than the hosting fees. Even if you are running an application where hosting is a big cost, there are plenty of people (such as myself) who have hosting resources they'd be happy to trade for some small slice of equity. Actually, yeah. let's make that a standing offer. if you have a startup and need SysAdmin/hosting stuff and are willing to trade a silver of equity for that, let me know.
goodgoblin 18y ago
I know this might sound like just whining, but these type of self-help posts from 37 signals kind of bother me. Step 1 isn't building something people like, in their playbook step 1 is build an influential blog and consulting service and leverage those to sell your newly built product. I'm not saying its a bad plan, its a great plan, but its not the plan they are advocating others adopt.
- tptacek 18y ago
  So what you're basically saying is, when launching a product, step 1 is to figure out how to bring your product to market and promote it, and step 2 is to deliver the product. We tend to hyperfocus on lines of code here, but any product manager at a software company would assume step 1.
  - goodgoblin 18y ago
    Fair point - what I'm also saying though is that this step, and the unique manner in which 37signals accomplished this step, is not part of their advice for others. 37signals offers workshops on keeping it real, but not on building the hype. Before you start bootstrapping make sure you aren't wasting your time or you could end up yanking on those straps for 3 years and little to show for it. I think the democratization of software, of the ability to build websites etc, is a wonderful thing, but I also think that it has tended to undervalue the marketing aspect. Perhaps its because for so many years the coders worked under the yoke of 'business types' who didn't know why a baby couldn't be delivered in one month with 9 mothers and now we feel like we can break free. Hopefully someone will come along with some open source marketing AI and I won't have to worry about it.
    - tptacek 18y ago
      Yeah, you and I agree 100%. I'm reacting to the tendency people have to discount 37S because "they had a popular blog". As if building a popular blog was something they were able to do only by being bitten by radioactive spiders.
dmix 18y ago
37Signals makes some very general statements without clarifying who should actually listen to them. I've responded below. http://dmix.ca/2008/07/a-rebels-answer-to-vc-or-bootstrap/ http://dmix.ca/2008/07/a-rebels-answer-to-vc-or-bootstrap/
ezmobius 18y ago
While this all may be a good plan it is not the only way to go. My startup, engineyard.com is only two years old. But we built something people wanted and started selling it to them in September of 2006 with only $120k seed money raised from friends and family. We were profitable by January 2007 and had 50% growth month over month for most of 2007. We could have just left it at that but we had plans to become an open source company as well as a hosting company. Developing new software projects like Rubinius, Merb and Vertebra take time and money to pay top notch engineers. So we decided to take a gamble on going big and we took some VC money. The thing is, we already had a profitable business and the VC's came to us, we never sought them out. So we were able to accelerate our strategy by taking the VC money and we got excellent terms since we already had a profitable business. And we took money from Benchmark that was less then other VC's were offering us because Benchmark's contacts and knowledge has been a huge strategic advantage for us. We have been able to grow our 3 person startup to over 80 employees worldwide, and through our VC's contacts were able to secure a series B from Amazon, NEA and Benchmark. We would never have been able to accelerate our growth and ideas as fast as we have if we never took money. By taking money we have cemented our place in the Ruby landscape as the 800 pound gorilla ;) So yes maybe it is the safe play to not take money and try to sell a product that people want and thats great! But sometimes it really is worth taking big risks with big money working toward big goals. This is not an either or scenario and both ways of doing things are equally viable
- comatose_kid 18y ago
  120K seed money is still quite a lot - I wonder if this is typical for a F&F round. How did you determine what your funding goal was? ps - thanks for the post - 'from the trenches' insights like these are really valuable. pps - members of your founding team also created the BASIC Stamp? Neat!
  - deleted 18y ago
    [deleted]
  - ezmobius 18y ago
    Well we were starting a new clustered, virtualized hosting environment so we had hard cash needs to get our first set of servers and equipment and data center space. So it's a little different then starting a software company without the same hard costs. We basically built something like ec2 but with more advanced features like load balancing and clustered, posix compliant filesystems. And we shipped before ec2 came out or was even known about publicly. This kind of system costs $$ to do right so the 120k went mostly to hardware and data center costs to bootstrap us to the point where we could take customers. We started planning in february of 2006 and shipped in september 2006 and it's been a wild ride since then. ps - sure, no problem. Let me know if anyone has any other questions. pps - yeah one of our founders started Parallax who made the BASIC stamp.
Mistone 18y ago
feels to general to take seriously - having a little cash in the bank is not a bad thing, lusting over a vc round before building something is also a bad scenario in most cases. Instead of right vs. wrong in the boostrap vs. funding argument, I would much rather find about about how to determine the right amount you need and some useful advice in finding investors that will help beyond writing a check. otherwise its just more useless one size fits all advice that i ignore.
iamdave 18y ago
I want to point out this: the costs of startups has dropped considerably, while investors are being tighter with their money. It's sort of a catch22, but I have to throw this "advice" out with the rest because there isn't a single reason for WHY I should actually follow it. Bootstrapping isn't easy, the definition of the name simply implies it, and these kinds of posts are sort of reminding me why, even in the beginning I kind of doubt 37s. Getting Real appears to me a bunch of quotes with "I agree" type paragraphs after it. Can ANYONE here tell me why I shouldn't take money if it's given to me and focus on growing my ideas instead of doing it and taking the results afterwards with a proverbial "grain of salt"?
wheels 18y ago
Does anyone remember the time when 37signals main product wasn't an ideology? That was neat.

59 points by terpua 18y ago

pg 18y ago

"Taking money from someone else kills more start-ups than anything else does." Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products.

tptacek 18y ago
Overfunding is what causes lots of companies to build lame products.
- pg 18y ago
  Not lots. Only a tiny fraction of startups have the luxury of being overfunded. Most are underfunded. And poor startups produce lame products at at least the rate that rich ones do. Therefore overfunding is responsible for at most a tiny fraction of lame products.
  - tptacek 18y ago
    That might be true in consumer web products. I wouldn't know. But it's wrong in enterprise IT products. Venture funding pushes people towards rube goldberg contraptions that overcome "defensibility" hurdles by sounding unlike anything else on the market and, not coincidentally, unlike anything anyone would want to buy. You want a good example? Procket.
    - shawndrost 18y ago
      In enterprise IT, the buyer isn't the user, and purchasing decisions are based on many factors besides quality of the software. It's unrealistic to blame all of that on VC funding.
      - tptacek 18y ago
        This is a myth about enterprise IT products. I'm calling the whole space "enterprise", because that's what Graham would call it, but we're talking about all products that sell for over the ~$60k to justify direct sales. That may include crazy stuff like SAP or PeopleSoft --- ew --- but it also includes Splunk and Palo Alto Networks and pretty much every security products. The buyer is the user for almost all of these products. Quality is very much an issue, although it's again stunted by VC.
cperciva 18y ago
Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products. I think their point is that those factors are related. If someone gives you a huge pile of cash, there's a temptation to answer any criticism with "you think it's lame now, but just wait -- once we're done you'll love it". If you don't have a lot of money, you can't use that excuse -- you have to build something which people want from the start.
- tptacek 18y ago
  VC will also often refuse to allow you to build simple products, or products that already exist in the market, or to go to market with a product that does not have a hockey stick projection behind it.
  - webwright 18y ago
    in a settting like 37s is talking about, funding probably means seed/angel funding. How much control/influence do you think these types of investors have? They have a minority stake, rarely have a board seat, etc. It's easy/popular to blame bad products on investors, but usually that's pretty unfair. I think (at the seed stage) it's usually due to the founders. I think better advice might be "don't take so much money that you have to give up early control." It seems to me that a well-run angel funded startup will get to market quicker and have a slightly bigger (and potentially quicker) exit if the founders play their cards right. So you trade a small minority stake for getting "there" (wherever there is) months or years sooner as well as having a slightly better shot at a win due to investor influence. This all assumes a goal of eventual liquidity, of course.
    - fallentimes 18y ago
      Did Rescuetime take angel funding?
      - tptacek 18y ago
        YC.
jkent 18y ago
What about lame people as the most common reason for failure (who also build lame products, with lame execution) ?

smoody 18y ago

this comes from a company that took money. granted it was from mr. bezos, but still.

johns 18y ago
To be fair, they had already built something people wanted first.
tptacek 18y ago
They had mid-millions/yr in revenue when that happened. They had already won.
pchristensen 18y ago
They've said multiple times that the main reason was to get access to Bezos. They didn't need his money, they wanted the man.
- echair 18y ago
  they wanted the man And to cash out individually, I suspect.
- anewaccountname 18y ago
  Then why did he have to pay them money? I'm sure he would have taken a stake for free.
  - pchristensen 18y ago
    That would have unfortunately valued his stake at $0.

vaksel 18y ago

That may have worked before, but with web 2.0, you have millions of startups that need the money to afford the hosting costs.

tptacek 18y ago
If your startup idea incurs large hosting costs before taking revenue, modify the idea.
fallentimes 18y ago
Yeah you can get a boat load of hosting for $500 per month or less. And the following is a great pitch to a VC: "we're getting too much traffic, and I can't afford the hosting - will you invest in me?"
lsc 18y ago
Wait, what? ec2, (I consider them my biggest competitor, they probably don't know I exist, and, well, my product is somewhat different) has lowered the cost of hosting dramatically. and there are places that are even cheaper than that (such as my company) - unless you are doing something like video sharing, hosting costs are simply not a huge deal anymore compared to programmer time. At what I bill out for as a contractor, for every hour of my time, you can run a amazon ec2 small node for a month and have enough left over for a cheap lunch. At most (USian, at least) startups, pizza for the meetings should cost more than the hosting fees. Even if you are running an application where hosting is a big cost, there are plenty of people (such as myself) who have hosting resources they'd be happy to trade for some small slice of equity. Actually, yeah. let's make that a standing offer. if you have a startup and need SysAdmin/hosting stuff and are willing to trade a silver of equity for that, let me know.

goodgoblin 18y ago

I know this might sound like just whining, but these type of self-help posts from 37 signals kind of bother me. Step 1 isn't building something people like, in their playbook step 1 is build an influential blog and consulting service and leverage those to sell your newly built product. I'm not saying its a bad plan, its a great plan, but its not the plan they are advocating others adopt.

tptacek 18y ago
So what you're basically saying is, when launching a product, step 1 is to figure out how to bring your product to market and promote it, and step 2 is to deliver the product. We tend to hyperfocus on lines of code here, but any product manager at a software company would assume step 1.
- goodgoblin 18y ago
  Fair point - what I'm also saying though is that this step, and the unique manner in which 37signals accomplished this step, is not part of their advice for others. 37signals offers workshops on keeping it real, but not on building the hype. Before you start bootstrapping make sure you aren't wasting your time or you could end up yanking on those straps for 3 years and little to show for it. I think the democratization of software, of the ability to build websites etc, is a wonderful thing, but I also think that it has tended to undervalue the marketing aspect. Perhaps its because for so many years the coders worked under the yoke of 'business types' who didn't know why a baby couldn't be delivered in one month with 9 mothers and now we feel like we can break free. Hopefully someone will come along with some open source marketing AI and I won't have to worry about it.
  - tptacek 18y ago
    Yeah, you and I agree 100%. I'm reacting to the tendency people have to discount 37S because "they had a popular blog". As if building a popular blog was something they were able to do only by being bitten by radioactive spiders.

dmix 18y ago

37Signals makes some very general statements without clarifying who should actually listen to them. I've responded below. http://dmix.ca/2008/07/a-rebels-answer-to-vc-or-bootstrap/ http://dmix.ca/2008/07/a-rebels-answer-to-vc-or-bootstrap/

ezmobius 18y ago

While this all may be a good plan it is not the only way to go. My startup, engineyard.com is only two years old. But we built something people wanted and started selling it to them in September of 2006 with only $120k seed money raised from friends and family. We were profitable by January 2007 and had 50% growth month over month for most of 2007. We could have just left it at that but we had plans to become an open source company as well as a hosting company. Developing new software projects like Rubinius, Merb and Vertebra take time and money to pay top notch engineers. So we decided to take a gamble on going big and we took some VC money. The thing is, we already had a profitable business and the VC's came to us, we never sought them out. So we were able to accelerate our strategy by taking the VC money and we got excellent terms since we already had a profitable business. And we took money from Benchmark that was less then other VC's were offering us because Benchmark's contacts and knowledge has been a huge strategic advantage for us. We have been able to grow our 3 person startup to over 80 employees worldwide, and through our VC's contacts were able to secure a series B from Amazon, NEA and Benchmark. We would never have been able to accelerate our growth and ideas as fast as we have if we never took money. By taking money we have cemented our place in the Ruby landscape as the 800 pound gorilla ;) So yes maybe it is the safe play to not take money and try to sell a product that people want and thats great! But sometimes it really is worth taking big risks with big money working toward big goals. This is not an either or scenario and both ways of doing things are equally viable

comatose_kid 18y ago
120K seed money is still quite a lot - I wonder if this is typical for a F&F round. How did you determine what your funding goal was? ps - thanks for the post - 'from the trenches' insights like these are really valuable. pps - members of your founding team also created the BASIC Stamp? Neat!
- deleted 18y ago
  [deleted]
- ezmobius 18y ago
  Well we were starting a new clustered, virtualized hosting environment so we had hard cash needs to get our first set of servers and equipment and data center space. So it's a little different then starting a software company without the same hard costs. We basically built something like ec2 but with more advanced features like load balancing and clustered, posix compliant filesystems. And we shipped before ec2 came out or was even known about publicly. This kind of system costs $$ to do right so the 120k went mostly to hardware and data center costs to bootstrap us to the point where we could take customers. We started planning in february of 2006 and shipped in september 2006 and it's been a wild ride since then. ps - sure, no problem. Let me know if anyone has any other questions. pps - yeah one of our founders started Parallax who made the BASIC stamp.

Mistone 18y ago

feels to general to take seriously - having a little cash in the bank is not a bad thing, lusting over a vc round before building something is also a bad scenario in most cases. Instead of right vs. wrong in the boostrap vs. funding argument, I would much rather find about about how to determine the right amount you need and some useful advice in finding investors that will help beyond writing a check. otherwise its just more useless one size fits all advice that i ignore.

iamdave 18y ago

I want to point out this: the costs of startups has dropped considerably, while investors are being tighter with their money. It's sort of a catch22, but I have to throw this "advice" out with the rest because there isn't a single reason for WHY I should actually follow it. Bootstrapping isn't easy, the definition of the name simply implies it, and these kinds of posts are sort of reminding me why, even in the beginning I kind of doubt 37s. Getting Real appears to me a bunch of quotes with "I agree" type paragraphs after it. Can ANYONE here tell me why I shouldn't take money if it's given to me and focus on growing my ideas instead of doing it and taking the results afterwards with a proverbial "grain of salt"?

wheels 18y ago

Does anyone remember the time when 37signals main product wasn't an ideology? That was neat.