March 2005(This essay is derived from a talk at the Harvard ComputerSociety.)You need three things to create a successful startup: to start withgood people, to make something customers actually want, and to spendas little money as possible. Most startups that fail do it becausethey fail at one of these. A startup that does all three willprobably succeed.And that's kind of exciting, when you think about it, because allthree are doable. Hard, but doable. And since a startup thatsucceeds ordinarily makes its founders rich, that implies gettingrich is doable too. Hard, but doable.If there is one message I'd like to get across about startups,that's it. There is no magically difficult step that requiresbrilliance to solve.The IdeaIn particular, you don't need a brilliant idea to start a startuparound. The way a startup makes money is to offer people bettertechnology than they have now. But what people have now is oftenso bad that it doesn't take brilliance to do better.Google's plan, for example, was simply to create a search site thatdidn't suck. They had three new ideas: index more of the Web, uselinks to rank search results, and have clean, simple web pages withunintrusive keyword-based ads. Above all, they were determined tomake a site that was good to use. No doubt there are great technicaltricks within Google, but the overall plan was straightforward.And while they probably have bigger ambitions now, this alone bringsthem a billion dollars a year. [1]There are plenty of other areas that are just as backward as searchwas before Google. I can think of several heuristics for generatingideas for startups, but most reduce to this: look at somethingpeople are trying to do, and figure out how to do it in a way thatdoesn't suck.For example, dating sites currently suck far worse than search didbefore Google. They all use the same simple-minded model.They seem to have approached the problem by thinking about how todo database matches instead of how dating works in the real world.An undergrad could build something better as a class project. Andyet there's a lot of money at stake. Online dating is a valuablebusiness now, and it might be worth a hundred times as much if itworked.An idea for a startup, however, is only a beginning. A lot ofwould-be startup founders think the key to the whole process is theinitial idea, and from that point all you have to do is execute.Venture capitalists know better. If you go to VC firms with abrilliant idea that you'll tell them about if they sign a nondisclosureagreement, most will tell you to get lost. That shows how much a mere idea is worth. The market price is less than the inconvenience of signing an NDA.Another sign of how little the initial idea is worth is the numberof startups that change their plan en route. Microsoft's originalplan was to make money selling programming languages, of all things.Their current business model didn't occur to them until IBM droppedit in their lap five years later.Ideas for startups are worth something, certainly, but the troubleis, they're not transferrable. They're not something you couldhand to someone else to execute. Their value is mainly as startingpoints: as questions for the people who had them to continue thinkingabout.What matters is not ideas, but the people who have them. Goodpeople can fix bad ideas, but good ideas can't save bad people. PeopleWhat do I mean by good people? One of the best tricks I learned during our startup was a rule for deciding who to hire. Could youdescribe the person as an animal? It might be hard to translate that into another language, but I think everyone in the US knows what it means. It means someone who takes their work a little too seriously; someone who does what they do so well that they passright through professional and cross over into obsessive.What it means specifically depends on the job: a salesperson whojust won't take no for an answer; a hacker who will stay up till 4:00 AM rather than go to bed leaving code with a bug in it; a PR person who will cold-call New York Times reporters on their cellphones; a graphic designer who feels physical pain when something is two millimeters out of place.Almost everyone who worked for us was an animal at what they did. The woman in charge of sales was so tenacious that I used to feelsorry for potential customers on the phone with her. You could sense them squirming on the hook, but you knew there would be no rest for them till they'd signed up.If you think about people you know, you'll find the animal test iseasy to apply. Call the person's image to mind and imagine thesentence "so-and-so is an animal." If you laugh, they're not. Youdon't need or perhaps even want this quality in big companies, butyou need it in a startup.For programmers we had three additional tests. Was the persongenuinely smart? If so, could they actually get things done? Andfinally, since a few good hackers have unbearable personalities, could we stand to have them around?That last test filters out surprisingly few people. We could bearany amount of nerdiness if someone was truly smart. What we couldn'tstand were people with a lot of attitude. But most of those weren'ttruly smart, so our third test was largely a restatement of thefirst.When nerds are unbearable it's usually because they're trying toohard to seem smart. But the smarter they are, the less pressurethey feel to act smart. So as a rule you can recognize genuinelysmart people by their ability to say things like "I don't know," "Maybe you're right," and "I don't understand x well enough."This technique doesn't always work, because people can be influencedby their environment. In the MIT CS department, there seems to bea tradition of acting like a brusque know-it-all. I'm told it derivesultimately from Marvin Minsky, in the same way the classic airlinepilot manner is said to derive from Chuck Yeager. Even genuinelysmart people start to act this way there, so you have to makeallowances.It helped us to have Robert Morris, who is one of the readiest tosay "I don't know" of anyone I've met. (At least, he was before he became a professor at MIT.) No one dared put on attitude around Robert, because he was obviously smarter than they were and yet hadzero attitude himself.Like most startups, ours began with a group of friends, and it wasthrough personal contacts that we got most of the people we hired.This is a crucial difference between startups and big companies.Being friends with someone for even a couple days will tell you more than companies could ever learn in interviews. [2]It's no coincidence that startups start around universities, becausethat's where smart people meet. It's not what people learn in classes at MIT and Stanford that has made technology companiesspring up around them. They could sing campfire songs in the classesso long as admissions worked the same.If you start a startup, there's a good chance it will be with peopleyou know from college or grad school. So in theory you ought to try to make friends with as many smart people as you can in school,right? Well, no. Don't make a conscious effort to schmooze; thatdoesn't work well with hackers.What you should do in college is work on your own projects. Hackersshould do this even if they don't plan to start startups, because it's the only real way to learn how to program. In some cases youmay collaborate with other students, and this is the best way toget to know good hackers. The project may even grow into a startup.But once again, I wouldn't aim too directly at either target. Don'tforce things; just work on stuff you like with people you like.Ideally you want between two and four founders. It would be hardto start with just one. One person would find the moral weight ofstarting a company hard to bear. Even Bill Gates, who seems to be able to bear a good deal of moral weight, had to have a co-founder. But you don't want so many founders that the company starts to looklike a group photo. Partly because you don't need a lot of peopleat first, but mainly because the more founders you have, the worsedisagreements you'll have. When there are just two or three founders,you know you have to resolve disputes immediately or perish. Ifthere are seven or eight, disagreements can linger and harden intofactions. You don't want mere voting; you need unanimity.In a technology startup, which most startups are, the foundersshould include technical people. During the Internet Bubble there were a number of startups founded by business people who then wentlooking for hackers to create their product for them. This doesn't work well. Business people are bad at deciding what to do with technology, because they don't know what the options are, or whichkinds of problems are hard and which are easy. And when businesspeople try to hire hackers, they can't tell which ones are good.Even other hackers have a hard time doing that. For business people it's roulette.Do the founders of a startup have to include business people? Thatdepends. We thought so when we started ours, and we asked several people who were said to know about this mysterious thing called"business" if they would be the president. But they all said no,so I had to do it myself. And what I discovered was that businesswas no great mystery. It's not something like physics or medicinethat requires extensive study. You just try to get people to payyou for stuff.I think the reason I made such a mystery of business was that I wasdisgusted by the idea of doing it. I wanted to work in the pure, intellectual world of software, not deal with customers' mundane problems. People who don't want to get dragged into some kind ofwork often develop a protective incompetence at it. Paul Erdos wasparticularly good at this. By seeming unable even to cut a grapefruitin half (let alone go to the store and buy one), he forced otherpeople to do such things for him, leaving all his time free formath. Erdos was an extreme case, but most husbands use the same trick to some degree.Once I was forced to discard my protective incompetence, I foundthat business was neither so hard nor so boring as I feared. Thereare esoteric areas of business that are quite hard, like tax lawor the pricing of derivatives, but you don't need to know about those in a startup. All you need to know about business to run a startup are commonsense things people knew before there were businessschools, or even universities.If you work your way down the Forbes 400 making an x next to the name of each person with an MBA, you'll learn something importantabout business school. After Warren Buffett, you don't hit another MBA till number 22,Phil Knight, the CEO of Nike. There are only 5 MBAs in the top50. What you notice in the Forbes 400 are a lot of people with technical backgrounds. Bill Gates, Steve Jobs, Larry Ellison,Michael Dell, Jeff Bezos, Gordon Moore. The rulers of the technologybusiness tend to come from technology, not business. So if you want to invest two years in something that will help you succeed in business, the evidence suggests you'd do better to learn how to hack than get an MBA. [3]There is one reason you might want to include business people in astartup, though: because you have to have at least one person willingand able to focus on what customers want. Some believe only businesspeople can do this-- that hackers can implement software, but not design it. That's nonsense. There's nothing about knowing how toprogram that prevents hackers from understanding users, or aboutnot knowing how to program that magically enables business people to understand them.If you can't understand users, however, you should either learn howor find a co-founder who can. That is the single most importantissue for technology startups, and the rock that sinks more of themthan anything else.What Customers WantIt's not just startups that have to worry about this. I think mostbusinesses that fail do it because they don't give customers whatthey want. Look at restaurants. A large percentage fail, about aquarter in the first year. But can you think of one restaurantthat had really good food and went out of business?Restaurants with great food seem to prosper no matter what. A restaurant with great food can be expensive, crowded, noisy, dingy,out of the way, and even have bad service, and people will keepcoming. It's true that a restaurant with mediocre food can sometimes attract customers through gimmicks. But that approach is very risky. It's more straightforward just to make the food good.It's the same with technology. You hear all kinds of reasons whystartups fail. But can you think of one that had a massively popularproduct and still failed?In nearly every failed startup, the real problem was that customersdidn't want the product. For most, the cause of death is listed as "ran out of funding," but that's only the immediate cause. Why couldn't they get more funding? Probably because the product wasa dog, or never seemed likely to be done, or both.When I was trying to think of the things every startup needed to do, I almost included a fourth: get a version 1 out as soon as youcan. But I decided not to, because that's implicit in makingsomething customers want. The only way to make something customerswant is to get a prototype in front of them and refine it based on their reactions.The other approach is what I call the "Hail Mary" strategy. You make elaborate plans for a product, hire a team of engineers to develop it (people who do this tend to use the term "engineer" for hackers), and then find after a year that you've spent two milliondollars to develop something no one wants. This was not uncommonduring the Bubble, especially in companies run by business types, who thought of software development as something terrifying thattherefore had to be carefully planned.We never even considered that approach. As a Lisp hacker, I come from the tradition of rapid prototyping. I would not claim (atleast, not here) that this is the right way to write every program,but it's certainly the right way to write software for a startup.In a startup, your initial plans are almost certain to be wrong insome way, and your first priority should be to figure out where. The only way to do that is to try implementing them.Like most startups, we changed our plan on the fly. At first weexpected our customers to be Web consultants. But it turned outthey didn't like us, because our software was easy to use and we hostedthe site. It would be too easy for clients to fire them. We alsothought we'd be able to sign up a lot of catalog companies, becauseselling online was a natural extension of their existing business.But in 1996 that was a hard sell. The middle managers we talked to at catalog companies saw the Web not as an opportunity, but assomething that meant more work for them.We did get a few of the more adventurous catalog companies. Amongthem was Frederick's of Hollywood, which gave us valuable experiencedealing with heavy loads on our servers. But most of our users were small, individual merchants who saw the Web as an opportunity to build a business. Some had retail stores, but many only existedonline. And so we changed direction to focus on these users.Instead of concentrating on the features Web consultants and catalogcompanies would want, we worked to make the software easy to use.I learned something valuable from that. It's worth trying very, very hard to make technology easy to use. Hackers are so used tocomputers that they have no idea how horrifying software seems tonormal people. Stephen Hawking's editor told him that every equationhe included in his book would cut sales in half. When you work onmaking technology easier to use, you're riding that curve up instead of down. A 10% improvement in ease of use doesn't just increase your sales 10%. It's more likely to double your sales.How do you figure out what customers want? Watch them. One of thebest places to do this was at trade shows. Trade shows didn't pay as a way of getting new customers, but they were worth it as marketresearch. We didn't just give canned presentations at trade shows.We used to show people how to build real, working stores. Which meant we got to watch as they used our software, and talk to them about what they needed.No matter what kind of startup you start, it will probably be a stretch for you, the founders, to understand what users want. Theonly kind of software you can build without studying users is the sort for which you are the typical user. But this is just the kindthat tends to be open source: operating systems, programminglanguages, editors, and so on. So if you're developing technologyfor money, you're probably not going to be developing it for peoplelike you. Indeed, you can use this as a way to generate ideas forstartups: what do people who are not like you want from technology?When most people think of startups, they think of companies likeApple or Google. Everyone knows these, because they're big consumerbrands. But for every startup like that, there are twenty more that operate in niche markets or live quietly down in the infrastructure.So if you start a successful startup, odds are you'll start one of those.Another way to say that is, if you try to start the kind of startupthat has to be a big consumer brand, the odds against succeedingare steeper. The best odds are in niche markets. Since startups make money by offering people something better than they had before,the best opportunities are where things suck most. And it would be hard to find a place where things suck more than in corporate IT departments. You would not believe the amount of money companiesspend on software, and the crap they get in return. This imbalanceequals opportunity.If you want ideas for startups, one of the most valuable things youcould do is find a middle-sized non-technology company and spend a couple weeks just watching what they do with computers. Most goodhackers have no more idea of the horrors perpetrated in these placesthan rich Americans do of what goes on in Brazilian slums.Start by writing software for smaller companies, because it's easierto sell to them. It's worth so much to sell stuff to big companiesthat the people selling them the crap they currently use spend alot of time and money to do it. And while you can outhack Oraclewith one frontal lobe tied behind your back, you can't outsell anOracle salesman. So if you want to win through better technology,aim at smaller customers. [4]They're the more strategically valuable part of the market anyway. In technology, the low end always eats the high end. It's easier to make an inexpensive product more powerful than to make a powerfulproduct cheaper. So the products that start as cheap, simple optionstend to gradually grow more powerful till, like water rising in a room, they squash the "high-end" products against the ceiling. Sundid this to mainframes, and Intel is doing it to Sun. MicrosoftWord did it to desktop publishing software like Interleaf andFramemaker. Mass-market digital cameras are doing it to the expensivemodels made for professionals. Avid did it to the manufacturers of specialized video editing systems, and now Apple is doing it toAvid. Henry Ford did it to the car makers that precededhim. If you build the simple, inexpensive option, you'll not onlyfind it easier to sell at first, but you'll also be in the best position to conquer the rest of the market.It's very dangerous to let anyone fly under you. If you have thecheapest, easiest product, you'll own the low end. And if youdon't, you're in the crosshairs of whoever does.Raising MoneyTo make all this happen, you're going to need money. Some startupshave been self-funding-- Microsoft for example-- but most aren't.I think it's wise to take money from investors. To be self-funding,you have to start as a consulting company, and it's hard to switchfrom that to a product company.Financially, a startup is like a pass/fail course. The way to getrich from a startup is to maximize the company's chances of succeeding,not to maximize the amount of stock you retain. So if you can tradestock for something that improves your odds, it's probably a smart move.To most hackers, getting investors seems like a terrifying andmysterious process. Actually it's merely tedious. I'll try togive an outline of how it works.The first thing you'll need is a few tens of thousands of dollars to pay your expenses while you develop a prototype. This is calledseed capital. Because so little money is involved, raising seedcapital is comparatively easy-- at least in the sense of getting aquick yes or no.Usually you get seed money from individual rich people called"angels." Often they're people who themselves got rich from technology.At the seed stage, investors don't expect you to have an elaboratebusiness plan. Most know that they're supposed to decide quickly.It's not unusual to get a check within a week based on a half-pageagreement.We started Viaweb with $10,000 of seed money from our friend Julian.But he gave us a lot more than money. He's a former CEO and alsoa corporate lawyer, so he gave us a lot of valuable advice aboutbusiness, and also did all the legal work of getting us set up asa company. Plus he introduced us to one of the two angel investors who supplied our next round of funding.Some angels, especially those with technology backgrounds, may be satisfied with a demo and a verbal description of what you plan to do. But many will want a copy of your business plan, if only toremind themselves what they invested in.Our angels asked for one, and looking back, I'm amazed how muchworry it caused me. "Business plan" has that word "business" init, so I figured it had to be something I'd have to read a bookabout business plans to write. Well, it doesn't. At this stage,all most investors expect is a brief description of what you plan to do and how you're going to make money from it, and the resumes of the founders. If you just sit down and write out what you'vebeen saying to one another, that should be fine. It shouldn't takemore than a couple hours, and you'll probably find that writing itall down gives you more ideas about what to do.For the angel to have someone to make the check out to, you're goingto have to have some kind of company. Merely incorporating yourselvesisn't hard. The problem is, for the company to exist, you have todecide who the founders are, and how much stock they each have. Ifthere are two founders with the same qualifications who are bothequally committed to the business, that's easy. But if you have anumber of people who are expected to contribute in varying degrees,arranging the proportions of stock can be hard. And once you'vedone it, it tends to be set in stone.I have no tricks for dealing with this problem. All I can say is,try hard to do it right. I do have a rule of thumb for recognizingwhen you have, though. When everyone feels they're getting aslightly bad deal, that they're doing more than they should for theamount of stock they have, the stock is optimally apportioned.There is more to setting up a company than incorporating it, ofcourse: insurance, business license, unemployment compensation, various things with the IRS. I'm not even sure what the list is,because we, ah, skipped all that. When we got real funding nearthe end of 1996, we hired a great CFO, who fixed everything retroactively. It turns out that no one comes and arrests you ifyou don't do everything you're supposed to when starting a company.And a good thing too, or a lot of startups would never get started.[5]It can be dangerous to delay turning yourself into a company, becauseone or more of the founders might decide to split off and start another company doing the same thing. This does happen. So whenyou set up the company, as well as as apportioning the stock, youshould get all the founders to sign something agreeing that everyone'sideas belong to this company, and that this company is going to beeveryone's only job.[If this were a movie, ominous music would begin here.]While you're at it, you should ask what else they've signed. Oneof the worst things that can happen to a startup is to run into intellectual property problems. We did, and it came closer to killing us than any competitor ever did.As we were in the middle of getting bought, we discovered that oneof our people had, early on, been bound by an agreement that saidall his ideas belonged to the giant company that was paying for himto go to grad school. In theory, that could have meant someoneelse owned big chunks of our software. So the acquisition came toa screeching halt while we tried to sort this out. The problem was, since we'd been about to be acquired, we'd allowed ourselves to run low on cash. Now we needed to raise more to keep going. But it's hard to raise money with an IP cloud over your head, becauseinvestors can't judge how serious it is.Our existing investors, knowing that we needed money and had nowhereelse to get it, at this point attempted certain gambits which Iwill not describe in detail, except to remind readers that the word "angel" is a metaphor. The founders thereupon proposed to walk away from the company, after giving the investors a brief tutorial on how to administer the servers themselves. And while this washappening, the acquirers used the delay as an excuse to welch on the deal.Miraculously it all turned out ok. The investors backed down; wedid another round of funding at a reasonable valuation; the giantcompany finally gave us a piece of paper saying they didn't own oursoftware; and six months later we were bought by Yahoo for muchmore than the earlier acquirer had agreed to pay. So we were happyin the end, though the experience probably took several years off my life.Don't do what we did. Before you consummate a startup, ask everyone about their previous IP history.Once you've got a company set up, it may seem presumptuous to goknocking on the doors of rich people and asking them to invest tensof thousands of dollars in something that is really just a bunch of guys with some ideas. But when you look at it from the richpeople's point of view, the picture is more encouraging. Most rich people are looking for good investments. If you really think youhave a chance of succeeding, you're doing them a favor by lettingthem invest. Mixed with any annoyance they might feel about being approached will be the thought: are these guys the next Google?Usually angels are financially equivalent to founders. They get the same kind of stock and get diluted the same amount in futurerounds. How much stock should they get? That depends on howambitious you feel. When you offer x percent of your company fory dollars, you're implicitly claiming a certain value for the wholecompany. Venture investments are usually described in terms ofthat number. If you give an investor new shares equal to 5% ofthose already outstanding in return for $100,000, then you've donethe deal at a pre-money valuation of $2 million.How do you decide what the value of the company should be? Thereis no rational way. At this stage the company is just a bet. Ididn't realize that when we were raising money. Julianthought we ought to value the company at several million dollars. I thought it was preposterous to claim that a couplethousand lines of code, which was all we had at the time, were worthseveral million dollars. Eventually we settled on one million,because Julian said no one would invest in a company with a valuationany lower. [6]What I didn't grasp at the time was that the valuation wasn't just the value of the code we'd written so far. It was also the valueof our ideas, which turned out to be right, and of all the futurework we'd do, which turned out to be a lot.The next round of funding is the one in which you might deal with actual venture capital firms. But don't wait till you've burned through your last round of funding to start approaching them. VCs are slow tomake up their minds. They can take months. You don't want to be running out of money while you're trying to negotiate with them.Getting money from an actual VC firm is a bigger deal than gettingmoney from angels. The amounts of money involved are larger, millionsusually. So the deals take longer, dilute you more, and imposemore onerous conditions.Sometimes the VCs want to install a new CEO of their own choosing. Usually the claim is that you need someone mature and experienced,with a business background. Maybe in some cases this is true. Andyet Bill Gates was young and inexperienced and had no business background, and he seems to have done ok. Steve Jobs got bootedout of his own company by someone mature and experienced, with abusiness background, who then proceeded to ruin the company. So Ithink people who are mature and experienced, with a businessbackground, may be overrated. We used to call these guys "newscasters,"because they had neat hair and spoke in deep, confident voices, andgenerally didn't know much more than they read on the teleprompter.We talked to a number of VCs, but eventually we ended up financingour startup entirely with angel money. The main reason was that we feared a brand-name VC firm would stick us with a newscaster aspart of the deal. That might have been ok if he was content tolimit himself to talking to the press, but what if he wanted to have a say in running the company? That would have led to disaster,because our software was so complex. We were a company whose wholem.o. was to win through better technology. The strategic decisionswere mostly decisions about technology, and we didn't need any helpwith those.This was also one reason we didn't go public. Back in 1998 our CFOtried to talk me into it. In those days you could go public as adogfood portal, so as a company with a real product and real revenues,we might have done well. But I feared it would have meant takingon a newscaster-- someone who, as they say, "can talk Wall Street'slanguage."I'm happy to see Google is bucking that trend. They didn't talkWall Street's language when they did their IPO, and Wall Streetdidn't buy. And now Wall Street is collectively kicking itself.They'll pay attention next time. Wall Street learns new languages fast when money is involved.You have more leverage negotiating with VCs than you realize. The reason is other VCs. I know a number of VCs now, and when you talkto them you realize that it's a seller's market. Even now thereis too much money chasing too few good deals.VCs form a pyramid. At the top are famous ones like Sequoia andKleiner Perkins, but beneath those are a huge number you've never heard of. What they all have in common is that a dollar from them is worth one dollar. Most VCs will tell you that they don't just provide money, but connections and advice. If you're talking to Vinod Khosla or John Doerr or Mike Moritz, this is true. But suchadvice and connections can come very expensive. And as you go downthe food chain the VCs get rapidly dumber. A few steps down from the top you're basically talking to bankers who've picked up a fewnew vocabulary words from reading Wired. (Does your productuse XML?) So I'd advise you to be skeptical about claimsof experience and connections. Basically, a VC is a source ofmoney. I'd be inclined to go with whoever offered the most money the soonest with the least strings attached.You may wonder how much to tell VCs. And you should, because someof them may one day be funding your competitors. I think the bestplan is not to be overtly secretive, but not to tell them everythingeither. After all, as most VCs say, they're more interested in thepeople than the ideas. The main reason they want to talk aboutyour idea is to judge you, not the idea. So as long as you seemlike you know what you're doing, you can probably keep a few thingsback from them. [7]Talk to as many VCs as you can, even if you don't want their money,because a) they may be on the board of someone who will buy you, and b) if you seem impressive, they'll be discouraged from investingin your competitors. The most efficient way to reach VCs, especiallyif you only want them to know about you and don't want their money,is at the conferences that are occasionally organized for startups to present to them.Not Spending ItWhen and if you get an infusion of real money from investors, whatshould you do with it? Not spend it, that's what. In nearly every startup that fails, the proximate cause is running out of money. Usually there is something deeper wrong. But even a proximate causeof death is worth trying hard to avoid.During the Bubble many startups tried to "get big fast." Ideallythis meant getting a lot of customers fast. But it was easy forthe meaning to slide over into hiring a lot of people fast.Of the two versions, the one where you get a lot of customers fastis of course preferable. But even that may be overrated. The ideais to get there first and get all the users, leaving none forcompetitors. But I think in most businesses the advantages of beingfirst to market are not so overwhelmingly great. Google is againa case in point. When they appeared it seemed as if search was amature market, dominated by big players who'd spent millions tobuild their brands: Yahoo, Lycos, Excite, Infoseek, Altavista, Inktomi. Surely 1998 was a little late to arrive at the party.But as the founders of Google knew, brand is worth next to nothingin the search business. You can come along at any point and make something better, and users will gradually seep over to you. As if to emphasize the point, Google never did any advertising. They'relike dealers; they sell the stuff, but they know better than to useit themselves.The competitors Google buried would have done better to spend thosemillions improving their software. Future startups should learnfrom that mistake. Unless you're in a market where products are as undifferentiated as cigarettes or vodka or laundry detergent,spending a lot on brand advertising is a sign of breakage. And fewif any Web businesses are so undifferentiated. The dating sites are running big ad campaigns right now, which is all the more evidence they're ripe for the picking. (Fee, fie, fo, fum, I smell a company run by marketing guys.)We were compelled by circumstances to grow slowly, and in retrospectit was a good thing. The founders all learned to do every job in the company. As well as writing software, I had to do sales andcustomer support. At sales I was not very good. I was persistent,but I didn't have the smoothness of a good salesman. My message to potential customers was: you'd be stupid not to sell online, and if you sell online you'd be stupid to use anyone else's software. Both statements were true, but that's not the way to convince people.I was great at customer support though. Imagine talking to acustomer support person who not only knew everything about theproduct, but would apologize abjectly if there was a bug, and thenfix it immediately, while you were on the phone with them. Customersloved us. And we loved them, because when you're growing slow byword of mouth, your first batch of users are the ones who were smartenough to find you by themselves. There is nothing more valuable,in the early stages of a startup, than smart users. If you listento them, they'll tell you exactly how to make a winning product. And not only will they give you this advice for free, they'll payyou.We officially launched in early 1996. By the end of that year wehad about 70 users. Since this was the era of "get big fast," Iworried about how small and obscure we were. But in fact we weredoing exactly the right thing. Once you get big (in users oremployees) it gets hard to change your product. That year waseffectively a laboratory for improving our software. By the end of it, we were so far ahead of our competitors that they never had a hope of catching up. And since all the hackers had spent manyhours talking to users, we understood online commerce way betterthan anyone else.That's the key to success as a startup. There is nothing more important than understanding your business. You might think thatanyone in a business must, ex officio, understand it. Far from it. Google's secretweapon was simply that they understood search. I was working for Yahoo when Google appeared, and Yahoo didn't understand search. Iknow because I once tried to convince the powers that be that wehad to make search better, and I got in reply what was then theparty line about it: that Yahoo was no longer a mere "search engine."Search was now only a small percentage of our page views, less thanone month's growth, and now that we were established as a "media company," or "portal," or whatever we were, search could safely beallowed to wither and drop off, like an umbilical cord.Well, a small fraction of page views they may be, but they are an important fraction, because they are the page views that Web sessions start with. I think Yahoo gets that now.Google understands a few other things most Web companies stilldon't. The most important is that you should put users beforeadvertisers, even though the advertisers are paying and users aren't.One of my favorite bumper stickers reads "if the people lead, the leaders will follow." Paraphrased for the Web, this becomes "getall the users, and the advertisers will follow." More generally,design your product to please users first, and then think about howto make money from it. If you don't put users first, you leave a gap for competitors who do.To make something users love, you have to understand them. And thebigger you are, the harder that is. So I say "get big slow." Theslower you burn through your funding, the more time you have tolearn.The other reason to spend money slowly is to encourage a culture of cheapness. That's something Yahoo did understand. David Filo's title was "Chief Yahoo," but he was proud that his unofficial titlewas "Cheap Yahoo." Soon after we arrived at Yahoo, we got an emailfrom Filo, who had been crawling around our directory hierarchy, asking if it was really necessary to store so much of our data onexpensive RAID drives. I was impressed by that. Yahoo's marketcap then was already in the billions, and they were still worryingabout wasting a few gigs of disk space.When you get a couple million dollars from a VC firm, you tend tofeel rich. It's important to realize you're not. A rich companyis one with large revenues. This money isn't revenue. It's moneyinvestors have given you in the hope you'll be able to generate revenues. So despite those millions in the bank, you're still poor.For most startups the model should be grad student, not law firm.Aim for cool and cheap, not expensive and impressive. For us thetest of whether a startup understood this was whether they had Aeronchairs. The Aeron came out during the Bubble and was very popularwith startups. Especially the type, all too common then, that waslike a bunch of kids playing house with money supplied by VCs. We had office chairs so cheap that the arms all fell off. This was slightly embarrassing at the time, but in retrospect the grad-studentyatmosphere of our office was another of those things we did right without knowing it.Our offices were in a wooden triple-decker in Harvard Square. Ithad been an apartment until about the 1970s, and there was still a claw-footed bathtub in the bathroom. It must once have been inhabitedby someone fairly eccentric, because a lot of the chinks in the walls were stuffed with aluminum foil, as if to protect against cosmic rays. When eminent visitors came to see us, we were a bitsheepish about the low production values. But in fact that placewas the perfect space for a startup. We felt like our role was to be impudent underdogs instead of corporate stuffed shirts, and that is exactly the spirit you want.An apartment is also the right kind of place for developing software.Cube farms suck for that, as you've probably discovered if you'vetried it. Ever notice how much easier it is to hack at home thanat work? So why not make work more like home?When you're looking for space for a startup, don't feel that it hasto look professional. Professional means doing good work, notelevators and glass walls. I'd advise most startups to avoidcorporate space at first and just rent an apartment. You want tolive at the office in a startup, so why not have a place designedto be lived in as your office?Besides being cheaper and better to work in, apartments tend to bein better locations than office buildings. And for a startuplocation is very important. The key to productivity is for peopleto come back to work after dinner. Those hours after the phonestops ringing are by far the best for getting work done. Greatthings 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 ofrestaurants around, not some dreary office park that's a wastelandafter 6:00 PM. Once a company shifts over into the model where everyone drives home to the suburbs for dinner, however late, you'velost something extraordinarily valuable. God help you if youactually start in that mode.If I were going to start a startup today, there are only three places I'd consider doing it: on the Red Line near Central, Harvard,or Davis Squares (Kendall is too sterile); in Palo Alto on Universityor California Aves; and in Berkeley immediately north or south of campus. These are the only places I know that have the right kindof vibe.The most important way to not spend money is by not hiring people. I may be an extremist, but I think hiring people is the worst thinga company can do. To start with, people are a recurring expense, which is the worst kind. They also tend to cause you to grow out of your space, and perhaps even move to the sort of uncool officebuilding that will make your software worse. But worst of all,they slow you down: instead of sticking your head in someone's office and checking out an idea with them, eight people have tohave a meeting about it. So the fewer people you can hire, thebetter.During the Bubble a lot of startups had the opposite policy. Theywanted to get "staffed up" as soon as possible, as if you couldn't get anything done unless there was someone with the corresponding job title. That's big company thinking. Don't hire people to fillthe gaps in some a priori org chart. The only reason to hire someoneis to do something you'd like to do but can't.If hiring unnecessary people is expensive and slows you down, whydo nearly all companies do it? I think the main reason is thatpeople like the idea of having a lot of people working for them.This weakness often extends right up to the CEO. If you ever endup running a company, you'll find the most common question peopleask is how many employees you have. This is their way of weighingyou. It's not just random people who ask this; even reporters do.And they're going to be a lot more impressed if the answer is athousand than if it's ten.This is ridiculous, really. If two companies have the same revenues,it's the one with fewer employees that's more impressive. When people used to ask me how many people our startup had, and I answered"twenty," I could see them thinking that we didn't count for much.I used to want to add "but our main competitor, whose ass we regularlykick, has a hundred and forty, so can we have credit for the largerof the two numbers?"As with office space, the number of your employees is a choice between seeming impressive, and being impressive. Any of you who were nerds in high school know about this choice. Keep doing it when you start a company.Should You?But should you start a company? Are you the right sort of personto do it? If you are, is it worth it?More people are the right sort of person to start a startup thanrealize it. That's the main reason I wrote this. There could be ten times more startups than there are, and that would probably bea good thing.I was, I now realize, exactly the right sort of person to start a startup. But the idea terrified me at first. I was forced into it because I was a Lisp hacker. The companyI'd been consulting for seemed to be running into trouble, and there were not a lot of other companies using Lisp. Since I couldn't bear the thought of programming in another language (this was 1995,remember, when "another language" meant C++) the only option seemedto be to start a new company using Lisp.I realize this sounds far-fetched, but if you're a Lisp hackeryou'll know what I mean. And if the idea of starting a startupfrightened me so much that I only did it out of necessity, there must be a lot of people who would be good at it but who are too intimidated to try.So who should start a startup? Someone who is a good hacker, betweenabout 23 and 38, and who wants to solve the money problem in oneshot instead of getting paid gradually over a conventional workinglife.I can't say precisely what a good hacker is. At a first rate university this might include the top half of computer science majors. Though of course you don't have to be a CS major to be ahacker; I was a philosophy major in college.It's hard to tell whether you're a good hacker, especially whenyou're young. Fortunately the process of starting startups tendsto select them automatically. What drives people to start startupsis (or should be) looking at existing technology and thinking, don't these guys realize they should be doing x, y, and z? And that's also a sign that one is a good hacker.I put the lower bound at 23 not because there's something thatdoesn't happen to your brain till then, but because you need to seewhat it's like in an existing business before you try running yourown. The business doesn't have to be a startup. I spent a yearworking for a software company to pay off my college loans. It wasthe worst year of my adult life, but I learned, without realizing it at the time, a lot of valuable lessons about the software business.In this case they were mostly negative lessons: don't have a lotof meetings; don't have chunks of code that multiple people own;don't have a sales guy running the company; don't make a high-endproduct; don't let your code get too big; don't leave finding bugsto QA people; don't go too long between releases; don't isolatedevelopers from users; don't move from Cambridge to Route 128; andso on. [8] But negative lessons are just as valuable as positive ones. Perhaps even more valuable: it's hard to repeat a brilliantperformance, but it's straightforward to avoid errors. [9]The other reason it's hard to start a company before 23 is that people won't take you seriously. VCs won't trust you, and will tryto reduce you to a mascot as a condition of funding. Customerswill worry you're going to flake out and leave them stranded. Evenyou yourself, unless you're very unusual, will feel your age to some degree; you'll find it awkward to be the boss of someone much older than you, and if you're 21, hiring only people younger rather limits your options.Some people could probably start a company at 18 if they wanted to.Bill Gates was 19 when he and Paul Allen started Microsoft. (Paul Allen was 22, though, and that probably made a difference.) So ifyou're thinking, I don't care what he says, I'm going to start acompany now, you may be the sort of person who could get away withit.The other cutoff, 38, has a lot more play in it. One reason I put it there is that I don't think many people have the physical staminamuch past that age. I used to work till 2:00 or 3:00 AM everynight, seven days a week. I don't know if I could do that now.Also,startups are a big risk financially. If you try something thatblows up and leaves you broke at 26, big deal; a lot of 26 yearolds are broke. By 38 you can't take so many risks-- especiallyif you have kids.My final test may be the most restrictive. Do you actually wantto start a startup? What it amounts to, economically, is compressingyour working life into the smallest possible space. Instead ofworking at an ordinary rate for 40 years, you work like hell for four. And maybe end up with nothing-- though in that case itprobably won't take four years.During this time you'll do little but work, because when you're notworking, your competitors will be. My only leisure activities wererunning, which I needed to do to keep working anyway, and aboutfifteen minutes of reading a night. I had a girlfriend for a totalof two months during that three year period. Every couple weeks Iwould 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.Working was often fun, because the people I worked with were someof my best friends. Sometimes it was even technically interesting.But only about 10% of the time. The best I can say for the other90% is that some of it is funnier in hindsight than it seemed then.Like the time the power went off in Cambridge for about six hours,and we made the mistake of trying to start a gasoline poweredgenerator inside our offices. I won't try that again.I don't think the amount of bullshit you have to deal with in astartup is more than you'd endure in an ordinary working life. It'sprobably less, in fact; it just seems like a lot because it's compressed into a short period. So mainly what a startup buys you is time. That's the way to think about it if you're trying to decide whether to start one. If you're the sort of person who wouldlike to solve the money problem once and for all instead of working for a salary for 40 years, then a startup makes sense.For a lot of people the conflict is between startups and graduateschool. Grad students are just the age, and just the sort of people,to start software startups. You may worry that if you do you'll blow your chances of an academic career. But it's possible to be part of a startup and stay in grad school, especially at first. Two of our three original hackers were in grad school the whole time, and both got their degrees. There are few sources of energyso powerful as a procrastinating grad student.If you do have toleave grad school, in the worst case it won't be for too long. Ifa startup fails, it will probably fail quickly enough that you can return to academic life. And if it succeeds, you may find you no longer have such a burning desire to be an assistant professor.If you want to do it, do it. Starting a startup is not the greatmystery it seems from outside. It's not something you have to knowabout "business" to do. Build something users love, and spend lessthan you make. How hard is that?Notes[1] Google's revenues are about two billion a year, but half comesfrom ads on other sites.[2] One advantage startups have over established companies is thatthere are no discrimination laws about starting businesses. For example, I would be reluctant to start a startup with a womanwho had small children, or was likely to have them soon. But you'renot allowed to ask prospective employees if they plan to have kids soon. Believe it or not, under current US law, you're not even allowed to discriminate on the basis of intelligence. Whereas whenyou're starting a company, you can discriminate on any basis youwant about who you start it with.[3] Learning to hack is a lot cheaper than business school, becauseyou can do it mostly on your own. For the price of a Linux box, acopy of K&R, and a few hours of advice from your neighbor's fifteenyear old son, you'll be well on your way.[4] Corollary: Avoid starting a startup to sell things to the biggestcompany of all, the government. Yes, there are lots of opportunitiesto sell them technology. But let someone else start those startups.[5] A friend who started a company in Germany told me they do care about the paperwork there, and that there's more of it. Which helpsexplain why there are not more startups in Germany.[6] At the seed stage our valuation was in principle $100,000, becauseJulian got 10% of the company. But this is a very misleading number,because the money was the least important of the things Julian gave us.[7] The same goes for companies that seem to want to acquire you.There will be a few that are only pretending to in order to pickyour brains. But you can never tell for sure which these are, sothe best approach is to seem entirely open, but to fail to mentiona few critical technical secrets.[8] I was as bad an employee as this place was a company. Iapologize to anyone who had to work with me there.[9] You could probably write a book about how to succeed in businessby doing everything in exactly the opposite way from the DMV.Thanks to Trevor Blackwell, Sarah Harlin, Jessica Livingston,and Robert Morris for reading drafts of this essay, and to SteveMelendez and Gregory Price for inviting me to speak.
