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Sometimes I wonder if the key to a successful startup is controlling expenses. I have seen so many companies who spend $750k on a "state of the art ecommerce ba

Sometimes I wonder if the key to a successful startup is controlling expenses. I have seen so many companies who spend $750k on a "state of the art ecommerce backend" just to sell a half dozen SKU's. Or they are a tech company with 0 technical staff (outsource everything to contractors). They almost never do well. Instead, the companies that seem to consistently do well tend to be the ones that have tiny budgets, are located in inexpensive places to live with lots of talent, and do things such that their liabilities are tiny.

nowarninglabel 12y ago
It goes hand-in-hand with the thought on 2+2 that the key to being a long-term successful poker player was not about being the best player, but about having the best bankroll management. Without it, you'd see these guys who would make big scores and then blow it all on games outside their core competency.
beachstartup 12y ago
> Sometimes I wonder if the key to a successful startup is controlling expenses it's necessary, but not sufficient.
state 12y ago
Could you give some examples of those that do well?
- IgorPartola 12y ago
  Instagram. I am not a fan of the product, but their story is the poster child for "we can't spend millions on the thing we want to build, so let's build the smallest possible thing that'll work and iterate."
  - nailer 12y ago
    Didn't they already build something pretty big with Burbn?
- adventured 12y ago
  PlentyOfFish, pure bootstrapping. Wikipedia, while not a for-profit company, had to operate in a lot of ways from day one like any other startup. They control costs quite well given their immense scale. Microsoft was fanatical about controlling costs. They were very profitable from early on. GitHub was founded in 2008, and only took their first major venture capital in 2012. The business funded (or close to funded) itself from very early on. Craigslist never took venture capital. Funded itself by very low costs of operation, and a minimum revenue approach. 37signals, from what I know, never took any major venture capital and was bootstrapped. Here's another list: http://37signals.com/bootstrapped http://37signals.com/bootstrapped
  - 650REDHAIR 12y ago
    Outside of Microsoft I don't think any of those companies are valued at $1B. Fab was swinging for the fences and struck out.
callmeed 12y ago
No it's not (IMO). At least not to the extent where cost control is paramount above growing revenue. Check out this HBR article from 2013: https://hbr.org/2013/04/three-rules-for-making-a-company-truly-great https://hbr.org/2013/04/three-rules-for-making-a-company-tru... (keep in mind this is a fairly exhaustive study of thousands of companies over 40+ years, not some link-baity blog) Rule 2: Revenue before cost—that is, prioritize increasing revenue over reducing costs. Now, there's a slight difference between "controlling expenses" and "reducing costs". But there's also a difference between "controlling expenses" and "making stupid decisions" and I think some of your examples are in the latter camp (as were Fab's). If you have product-market fit and you can extract value, your focus should be on growing revenue. A couple $100/mo SaaS subscriptions, a corporate retreat, or buying employee lunches aren't going to make or break you. Unfortunately, as Fab confessed (in the article), they never found product-market fit ("we spent $200M and we have not proven our business model"). Playing with millions of other people's dollars™ makes it easy to forget this I suppose.
- IgorPartola 12y ago
  I can see that. Why limit your revenue by a potential $1m/year because you don't want to spend the extra $50,000/year (for example). At the same time when you start out saying "I need to pour millions into this idea to make a single dollar back", I start questioning whether it's a viable idea in the first place. Granted, some ideas/problems do require expensive solutions: converting from our current transportation system to driverless cars cannot be done on the cheap. However, if I was an investor, I'd be picking startups running out of someone's basement on a farm in Iowa, rather than someone that wants to use my money to open a lavish office in NYC. Then again, I'm not an investor, so I have no idea what I'm talking about :)
  - callmeed 12y ago
    Yes, if it takes you $5 to make $1, then something is probably wrong. But, if it takes you $1.10 to make $1 and there's a clear path to efficiencies/economies of scale, then maybe you're on to something. Here are some VC perspectives on burn rates: http://avc.com/2014/09/burn-baby-burn/ http://avc.com/2014/09/burn-baby-burn/ http://www.businessinsider.com/bill-gurley-silicon-valley-is-taking-on-too-much-risk-2014-9 http://www.businessinsider.com/bill-gurley-silicon-valley-is...
MichaelGG 12y ago
Yeah it seems they had spent millions and were only managing 1000 items at one point. Why that needed a $80M investment in Europe defies logic. I'm sure I'm misunderstanding, but Fab seems like a curated Etsy plus a lame (compared to Amazon) fulfillment system. If the value of your company is all in front end (marketing/UI) I'm not sure it makes sense to spend so much on the backend. And, if you're selling a $10 light with $50 of cups on it for almost $2000, you've got plenty of margin to spend on outsourcing... Would Amazon fulfillment have been too expensive/unusable for their use case?
- eonw 12y ago
  i think their fulfillment issues came from allowing the producers, whom probably didnt ship a lot of product daily, to manage their own shipping. Generally you need to have a good shipping team to streamline packing and shipping to keep it on time and efficient.
- girvo 12y ago
  Expanding into Europe was an expensive mistake, definitely. But the Samwer brothers are a dangerous team to play against, so I understand why they wanted to head them off at the pass. They just went about it in the wrong way, at least that's how it seems in hindsight.
  - chubot 12y ago
    Yeah but those guys don't threaten the US business. They might clone Groupon in Europe, but they're not going to expand out of Europe and take over Groupon in the US. To try to head them off before you've taken enough profit in the US Is a curious combination of hubris and greed. Especially at that cost.
    - at-fates-hands 12y ago
      >>> To try to head them off before you've taken enough profit in the US Is a curious combination of hubris and greed. Especially at that cost. This was my reaction as well. Instead of working their business model here and continuing to ramp up profits and margins, they took a huge bet to get into Europe. Not sure why they thought this, considering there are a half dozen other countries you could try and get in front of first. In the end, their panic more than anything killed the business. I would also say greed played a big part. Instead of building a solid, sustainable business over a period of time, they got greedy and over stepped their bounds.
MicroBerto 12y ago
I'm with you, but it really depends on the attitudes, philosophy, and ethics of the leadership. I'm bootstrapped and ran in the red for an appreciable amount of time, and I will say that I will never do that again. Not more more than three months with my own money, at least. Obviously some business models are made to work in this capacity. Get funding, spend big, get users/revenue at any cost, and sell. But not me. I will never go through that amount of stress ever again, and will take no part in any such business that I'm a part of. I also don't think it's ethical to take someone else's money and do it, but hey, if that's the business plan they bought into, then that's their deal - good luck is all I can say. In the end, I believe that reasonable, non-VC-funded success comes down to one basic thing: make more money than you spend (and if you're bootstrapping / running solo, that includes personal expenses). If that requires you to work 16+ hour days, cut expenses like mad, or do client work to make up for the gap, so be it. Screw the red and screw burn rate. No thank you.
- IgorPartola 12y ago
  I think you've hit the nail on the head: "it really depends on the attitudes, philosophy, and ethics of the leadership". Having seen what being in the red does to people, I'd prefer to start small, grow slow and steady and win the long game; yet I understand that's not everybody's philosophy or preference and that doesn't fit every type of company or product.

nowarninglabel 12y ago

It goes hand-in-hand with the thought on 2+2 that the key to being a long-term successful poker player was not about being the best player, but about having the best bankroll management. Without it, you'd see these guys who would make big scores and then blow it all on games outside their core competency.

beachstartup 12y ago

> Sometimes I wonder if the key to a successful startup is controlling expenses it's necessary, but not sufficient.

state 12y ago

Could you give some examples of those that do well?

IgorPartola 12y ago
Instagram. I am not a fan of the product, but their story is the poster child for "we can't spend millions on the thing we want to build, so let's build the smallest possible thing that'll work and iterate."
- nailer 12y ago
  Didn't they already build something pretty big with Burbn?
adventured 12y ago
PlentyOfFish, pure bootstrapping. Wikipedia, while not a for-profit company, had to operate in a lot of ways from day one like any other startup. They control costs quite well given their immense scale. Microsoft was fanatical about controlling costs. They were very profitable from early on. GitHub was founded in 2008, and only took their first major venture capital in 2012. The business funded (or close to funded) itself from very early on. Craigslist never took venture capital. Funded itself by very low costs of operation, and a minimum revenue approach. 37signals, from what I know, never took any major venture capital and was bootstrapped. Here's another list: http://37signals.com/bootstrapped http://37signals.com/bootstrapped
- 650REDHAIR 12y ago
  Outside of Microsoft I don't think any of those companies are valued at $1B. Fab was swinging for the fences and struck out.

callmeed 12y ago

No it's not (IMO). At least not to the extent where cost control is paramount above growing revenue. Check out this HBR article from 2013: https://hbr.org/2013/04/three-rules-for-making-a-company-truly-great https://hbr.org/2013/04/three-rules-for-making-a-company-tru... (keep in mind this is a fairly exhaustive study of thousands of companies over 40+ years, not some link-baity blog) Rule 2: Revenue before cost—that is, prioritize increasing revenue over reducing costs. Now, there's a slight difference between "controlling expenses" and "reducing costs". But there's also a difference between "controlling expenses" and "making stupid decisions" and I think some of your examples are in the latter camp (as were Fab's). If you have product-market fit and you can extract value, your focus should be on growing revenue. A couple $100/mo SaaS subscriptions, a corporate retreat, or buying employee lunches aren't going to make or break you. Unfortunately, as Fab confessed (in the article), they never found product-market fit ("we spent $200M and we have not proven our business model"). Playing with millions of other people's dollars™ makes it easy to forget this I suppose.

IgorPartola 12y ago
I can see that. Why limit your revenue by a potential $1m/year because you don't want to spend the extra $50,000/year (for example). At the same time when you start out saying "I need to pour millions into this idea to make a single dollar back", I start questioning whether it's a viable idea in the first place. Granted, some ideas/problems do require expensive solutions: converting from our current transportation system to driverless cars cannot be done on the cheap. However, if I was an investor, I'd be picking startups running out of someone's basement on a farm in Iowa, rather than someone that wants to use my money to open a lavish office in NYC. Then again, I'm not an investor, so I have no idea what I'm talking about :)
- callmeed 12y ago
  Yes, if it takes you $5 to make $1, then something is probably wrong. But, if it takes you $1.10 to make $1 and there's a clear path to efficiencies/economies of scale, then maybe you're on to something. Here are some VC perspectives on burn rates: http://avc.com/2014/09/burn-baby-burn/ http://avc.com/2014/09/burn-baby-burn/ http://www.businessinsider.com/bill-gurley-silicon-valley-is-taking-on-too-much-risk-2014-9 http://www.businessinsider.com/bill-gurley-silicon-valley-is...

MichaelGG 12y ago

Yeah it seems they had spent millions and were only managing 1000 items at one point. Why that needed a $80M investment in Europe defies logic. I'm sure I'm misunderstanding, but Fab seems like a curated Etsy plus a lame (compared to Amazon) fulfillment system. If the value of your company is all in front end (marketing/UI) I'm not sure it makes sense to spend so much on the backend. And, if you're selling a $10 light with $50 of cups on it for almost $2000, you've got plenty of margin to spend on outsourcing... Would Amazon fulfillment have been too expensive/unusable for their use case?

eonw 12y ago
i think their fulfillment issues came from allowing the producers, whom probably didnt ship a lot of product daily, to manage their own shipping. Generally you need to have a good shipping team to streamline packing and shipping to keep it on time and efficient.
girvo 12y ago
Expanding into Europe was an expensive mistake, definitely. But the Samwer brothers are a dangerous team to play against, so I understand why they wanted to head them off at the pass. They just went about it in the wrong way, at least that's how it seems in hindsight.
- chubot 12y ago
  Yeah but those guys don't threaten the US business. They might clone Groupon in Europe, but they're not going to expand out of Europe and take over Groupon in the US. To try to head them off before you've taken enough profit in the US Is a curious combination of hubris and greed. Especially at that cost.
  - at-fates-hands 12y ago
    >>> To try to head them off before you've taken enough profit in the US Is a curious combination of hubris and greed. Especially at that cost. This was my reaction as well. Instead of working their business model here and continuing to ramp up profits and margins, they took a huge bet to get into Europe. Not sure why they thought this, considering there are a half dozen other countries you could try and get in front of first. In the end, their panic more than anything killed the business. I would also say greed played a big part. Instead of building a solid, sustainable business over a period of time, they got greedy and over stepped their bounds.

MicroBerto 12y ago

I'm with you, but it really depends on the attitudes, philosophy, and ethics of the leadership. I'm bootstrapped and ran in the red for an appreciable amount of time, and I will say that I will never do that again. Not more more than three months with my own money, at least. Obviously some business models are made to work in this capacity. Get funding, spend big, get users/revenue at any cost, and sell. But not me. I will never go through that amount of stress ever again, and will take no part in any such business that I'm a part of. I also don't think it's ethical to take someone else's money and do it, but hey, if that's the business plan they bought into, then that's their deal - good luck is all I can say. In the end, I believe that reasonable, non-VC-funded success comes down to one basic thing: make more money than you spend (and if you're bootstrapping / running solo, that includes personal expenses). If that requires you to work 16+ hour days, cut expenses like mad, or do client work to make up for the gap, so be it. Screw the red and screw burn rate. No thank you.

IgorPartola 12y ago
I think you've hit the nail on the head: "it really depends on the attitudes, philosophy, and ethics of the leadership". Having seen what being in the red does to people, I'd prefer to start small, grow slow and steady and win the long game; yet I understand that's not everybody's philosophy or preference and that doesn't fit every type of company or product.