In the final installment in our ongoing series exploring Paul Graham’s legendary essay, ‘How to Start a Startup’, Mr. Graham takes us through responsibly handling investor funds and how to know if starting a startup is right for you.
Not Spending Money
According to Mr. Graham, in nearly every startup that fails, the cause of failure is running out of money. With this in mind, Mr. Graham’s first word of advice on handling investor funds is not to spend it. In order to save money, Mr. Graham almost counter-intuitively recommends considering growing slowly. In doing so, Mr. Graham suggests a small team with less overhead will learn more of the business as a whole. Thi in turn will be an advantage to all employees going forward. Also by growing slowly, an early startup is able to give its customers lots of personal attention. This in turn creates a sense of loyalty which pays dividends for everything from repeat business to strong word-of-mouth marketing. According to Mr. Graham, such early customers can also be an invaluable source of feedback on how to improve your product or service and, best of all, they will pay you to provide this feedback. According to Mr. Graham, ‘To make something users love, you have to understand them. And the bigger you are, the harder that is. So I say “get big slow.” The slower you burn through your funding, the more time you have to learn.’
Spend Like You Don’t Have It
According to Mr. Graham another advantage to getting big slowly is it encourages a ‘culture of cheapness’. According to Mr. Graham, ‘When you get a couple million dollars from a VC firm, you tend to feel rich. It’s important to realize you’re not. A rich company is one with large revenues. This money isn’t revenue. It’s money investors have given you in the hope you’ll be able to generate revenues. So despite those millions in the bank, you’re still poor.’ According to Mr. Graham, the atmosphere of a startup should feel more like a grad school than a law office. In looking back on his first company Mr. Graham remarks, ‘We felt like our role was to be impudent underdogs instead of corporate stuffed shirts, and that is exactly the spirit you want.’
Setting the Table
Also according to Mr. Graham, the location of the office is very important. According to Mr. Graham, ‘The key to productivity is for people to come back to work after dinner. Those hours after the phone stops ringing are by far the best for getting work done. Great things happen when a group of employees go out to dinner together, talk over ideas, and then come back to their offices to implement them. So you want to be in a place where there are a lot of restaurants around, not some dreary office park that’s a wasteland after 6:00 PM.’
The Best Way to Save Money
According to Mr. Graham, the best way to save money is by not hiring. According to Mr. Graham people are a re-occurring expense. They may also cause you to have to buy bigger offices and, worst of all, they slow you down. According to Mr. Graham the only reason to hire someone is to do something you’d like to do but can’t. There is a natural tendency to want to hire people. Often, the first question people ask when they hear you run a company is how many employees you have. It’s is a way of measuring you up. Don’t be fooled by this. According to Mr. Graham, you should not hire unless it’s absolutely necessary. In a final note on the subject, Mr. Graham adds, ‘The number of your employees is a choice between seeming impressive, and being impressive.’
In the final chapter of his essay Mr. Graham raises the questions of how to know if and when you are ready to start a company, and if you actually should. According to Mr. Graham more people are the sort who should start a company than even realize it. In fact, Mr. Graham states this is the main reason he wrote the essay in the first place. He believes there could be ten times more startups than there are; and that would be a good thing.
Does Age Matter?
According to Mr. Graham, the ideal startup founder should be at least 23 years old. This is because, a certain degree of real-world business experience should be had before starting one’s own business, and also because people may not take you seriously before that age. On the other end of the scale, Mr. Graham recommends trying to start a startup before the age of 38. He recommends this for several reasons. First, starting a startup requires much physical stamina. When starting his own company Mr. Graham says used to stay up working until 3am, seven nights a week. He’s not sure people older than 38 will have this stamina. Also, startups are a large financial risk. Younger people can more easily absorb the financial blow if things don’t work out, especially if children are involved.
The Final Test
According to Mr. Graham, the final test is to ask yourself whether or not you truly want to start a startup. ‘What it amounts to, economically, is compressing your working life into the smallest possible space. Instead of working at an ordinary rate for 40 years, you work like hell for four. And maybe end up with nothing.’ To illustrate this point further, Mr. Graham emphasizes just how much work is involved with a startup: ‘During this time you’ll do little but work, because when you’re not working, your competitors will be. My only leisure activities were running, which I needed to do to keep working anyway, and about fifteen minutes of reading a night. I had a girlfriend for a total of two months during that three-year period. Every couple weeks I would take a few hours off to visit a used bookshop or go to a friend’s house for dinner. I went to visit my family twice. Otherwise I just worked.’
However, the benefits of starting your own startup may be immense. ‘If you’re the sort of person who would like to solve the money problem once and for all instead of working for a salary for 40 years, then a startup makes sense.’
In closing, Mr. Graham sums up everything he said in the entire essay in his typical succinct manner: ‘If you want to do it, do it. Starting a startup is not the great mystery it seems from outside. It’s not something you have to know about “business” to do. Build something users love, and spend less than you make. How hard is that?’