How To Start A Startup (1/3) — Journey
Warning: This is my longest letter (whaddaya know, startups aren’t easy). The total reading time shows about 11min (funnily enough, that is a long time nowadays)… But I guarantee it will be useful.
Hello dear,
We are approaching the end of the series (sad face).
Since we’ve talked a lot about the safest ways to make money, I wanted to end with something that’d appeal to your ambitious side.
Currently, no career move is more ambitious than starting a startup.
But startups are super difficult. There’s a ton of bad advice out there.
On the bright side, there’s some good advice too! And the next three letters are a summary.
But first, a couple of caveats.
Caveat #1: You don’t have to be an expert
Don’t know the difference between series A or series B round? Not a problem! (Neither do I, really).
You don’t have to be an expert in startups to build a successful startup. You need to be an expert in your users.
People who know everything about startups tend to treat it like a checklist: Have an idea, incorporate, get a nice logo, raise a bunch of money, hire a bunch of people… And then fail.
Why? Because they were playing house. They were going through the motions of starting a startup when they should have focused on their users instead.
Don’t play house.
“ If I met an undergrad who knew all about convertible notes and employee agreements and (God forbid) class FF stock, I wouldn’t think ‘here is someone who is way ahead of their peers.’ It would set off alarms.” — Paul Graham
Caveat #2: I’m only writing about phase one
Startups (like life) happen in phases.
Therefore, advice that worked in one phase may not apply to another phase (another reason they’re so hard).
“Every single thing in your company breaks every time you roughly triple in size. […]
When you’re just 1 person, everything kind of works. You sort of figure it out.
And then, at some point, you have 3 people, and now, things are kind of different. Making decisions and everything with 3 people is different. But you adjust to that. Then, you’re fine for a while.
You get to 10 people, and everything kind of breaks again. You figure that out, and then you get to 30 people and everything is different, and then 100 and then 300 and then 1,000.
Everything breaks at roughly these points of 3 and 10.
And by ‘everything,’ it means everything: how you handle payroll, how you schedule meetings, what kind of communications you use, how you do budgeting, who actually makes decisions. […]
And then, you turn around and realize… we’re at 400 people now, but some of our processes and systems we set in place when we were 30.” — Hiroshi Mikitani
Throughout the next three letters, I only focus on the 1–3 people phase.
If you already have a successful startup with 10+ people, you’ll read this letter while smiling and nodding your head in approval (because everything will sound all too familiar).
If you’re a young person with an idea, this letter is perfect for you!
So let’s begin.
Meet Your Teacher: Paul Graham
Of course, none of this advice comes from me.
It all comes from the Yoda of startups, Paul Graham (PG).
Why trust his advice? Because he cofounded Y Combinator. Which means he’s tested what works best on hundreds (if not thousands) of startups.
No one (NO ONE) has more “successful startup pattern recognition” than PG.
If you’re thinking about starting a startup, his essays are a priceless resource. I’ve read all 150+ essays in the past few weeks. The next three letters are simply a summary of the themes I saw over and over (and over) again.
What Is A Startup
I can’t find the most recent numbers, but thousands of businesses are created every year in the US.
Are all those businesses startups? No.
Most of those businesses are service businesses. Restaurants, barbershops, plumbers, etc…
Startups are product businesses. They make one product and scale it to lots of people. They are designed to grow very fast.
Sidenote: This isn’t black and white. Some service businesses grew like startups. For example, McDonald’s (they created one system and copy pasted it all around the world, hence why all their restaurants looks the same). They practically function like software. But they’re a rare case.
For simplicity, I’ll only talk about software startups. They’re cheap and easy to start (therefore available to most of us).
Why You Shouldn’t Start A Startup
As PG said, “ starting a successful startup is similar to having kids in that it’s like a button you push that changes your life irrevocably.”
Most people should not try to start startups.
Why? Because they’re super duper hard.
Don’t believe me? Scroll down.
You’ll find a list of five reasons not to start a startup. Unless you read each item and think “I can handle that,” you probably shouldn’t begin.
1. Likely To Fail
This number is too neat to be true, but it’s memorable. 90% of startups fail.
The odds are completely against you as soon as you enter the arena.
2. Financially Risky
Startups can deliver huge rewards. But remember reward is proportionate to risk.
You can win big, or you can lose it all. They’re very binary in that way.
Someone with kids and a mortgage should think thrice before even trying.
This is why it’s better to start a startup when you’re young. If you end up broke at 26, big deal. Most 26 year olds are broke.
3. Stressful
Once you start a startup, everyone around you will know you’re in “get rich or go broke” mode.
That’s just where the stress begins.
As soon as you start getting users, things will go wrong every day.
If you get stressed easily, the startup rollercoaster is the last thing you want.
4. All Consuming
You’ll work harder as a startup founder than you’ve ever worked in your life.
In a big company, no one will force you to work on software, customer service, design, marketing, finance, and legal work at the same time. If they did, they’d go to jail.
In a startup, that’s your routine. Seven days a week (for many, many years).
A side effect is you lose your social life. No more holidays with the family, trips with the significant other, or hanging out with friends.
Read that last part again slowly. I am not exaggerating.
“I never took a day off in my twenties. Not one.” — Bill Gates
“When my brother and I were starting our first company, instead of getting an apartment we just rented a small office and slept on the couch. […] We had just one computer so the website was up during the day and I was coding at night. Seven days a week, all the time.” — Elon Musk
5. Takes A Long Time
It takes about 5+ years for the average startup to succeed (7–10 for the really big ones).
Wait, it gets worse. You’ll have no indication of whether or not you’re doing the right thing for the first 2 years!
Sounds fun, right?
“I realize I’ve made startups sound pretty hard. If I haven’t, let me try again: starting a startup is really hard.” — Paul Graham
Why You Should Start A Startup
If you’re absolutely terrified of everything I mentioned so far, you probably shouldn’t start a startup.
However, I know someone out there read all those points with a smirk thinking “bring on the pain.”
I like you.
But why would anyone in their right mind put up with all that pain? Here are five reasons.
1. Compress Your Work Life
Starting a startup doesn’t necessarily mean you’ll work harder than most people.
The difference is instead of working at a steady pace for 40 years, you’ll work like hell for 4.
Life is short, spending all of it working at a job you dislike is a tragedy. A startup gives you a chance to avoid that.
2. Measure Productivity
At a big company, it doesn’t really matter if you work super hard or slack off. You’ll get paid roughly the same each month.
At a startup, more productivity equals more reward.
This isn’t good if you’re lazy. But if you enjoy challenges and hard work, a startup will reward you well.
3. Higher Reward
By definition, startup founders either fail or get rich.
Yes, most startups fail. But those that succeed will pay their founders more than 10X what they would have made at an ordinary job.
However, the reward from a startup is much more than just financial.
Instead of coworkers, you get to build a tribe of the smartest, most talented people you know. Together, you’ll experience enormous highs and devastating lows. This creates a bond you’d never find in a day job (they’ll become family).
Working for a big company teaches you to differentiate between work and life. In a startup, both are the same.
4. Go Straight To The User
When you work for a big company, you’re essentially helping your bosses sell their product to users.
This is also why you don’t get paid according to your productivity. The company distributes its revenues among its employees (in the best way it can).
If you start a startup, you remove the middle man.
Instead of letting your bosses figure out what users want, you go straight to the user and ask what she wants.
If you deliver it well, you get paid the market price (not a subjective amount your boss picked).
“Why spend twenty years climbing the corporate ladder when you can get rewarded directly by the market?” — Paul Graham
5. Level The Playing Field
If you apply for a job (whether it be at a large corporation all the way to auditioning for a movie), the person on the other side of the table will judge you and determine whether or not you’re good enough.
Your track record does matter, but so do shallow things like your looks or connections.
When you start a startup, the only thing that matters is whether or not your user likes your product.
They don’t give a isht about you.
This is wonderful!
Case in point; this app. Who’s the founder? How hard did she work? What was her GPA? What does she look like? Who does she know? How rich are her parents?
I don’t know and I don’t care. I just love the app.
In fact, you only know who Mark Zuckerberg is because he created Facebook. Not the other way around.
Startups level the playing field. Your track record doesn’t matter, only your results.
Universal Startup Tips
There are only two things you need to start a startup: An idea and cofounder(s).
We’ll talk more about both of those in future letters.
For now, here are three tips that will help most (if not all) startups.
1. Don’t Spend Money
Technology has advanced so fast you barely need that much money to start a startup.
In fact, most startups could get airborne with $15,000.
This is especially true if you can write code. Why? Because if you can’t build your own product, you’ll need to hire someone else to do it for you.
Hiring people kills startups.
If you learn how to code, all you’ll need is a laptop, wifi connection, a cool cofounder, and many cans of Red Bull.
The less you spend, the higher your odds of success.
“The main cost of starting a Web-based startup is food and rent. Which means it doesn’t cost much more to start a company than to be a total slacker. You can probably start a startup on ten thousand dollars of seed funding, if you’re prepared to live on ramen.” — Paul Graham
2. Get Ramen Profitable
This is one of Y Combinator’s mottos.
Ramen profitable means the startup is making just enough money to pay for the founder’s living expenses.
This helps you in two ways:
- Founders don’t need a day job to pay the bills anymore. So they can fully focus on the startup.
- Founders won’t be at the mercy of investors. They’ll still need to raise money, but they won’t be desperate.
“A startup with a couple founders in their early twenties can have expenses so low that they could be profitable on as little as $2000 per month. That’s negligible as corporate revenues go, but the effect on your morale and your bargaining position is anything but. At YC we use the phrase ‘ramen profitable’ to describe the situation where you’re making just enough to pay your living expenses. Once you cross into ramen profitable, everything changes. You may still need investment to make it big, but you don’t need it this month.” — Paul Graham
3. Grow, Grow, Grow!
Successful startups have 3 phases (together they’re shaped like an S-curve).
- An initial phase of slow or no growth while the startup is figuring out what it’s doing.
- Once the startup hits a nerve and builds something people love (and lots of people want), it will experience a period of very rapid growth.
- After the startup becomes a big company, growth will slow.
You know you’re running a startup when you hit the second phase.
How do you grow really quickly? Make something lots of people want and deliver it to all those people.
Once you get growth, everything else tends to fall into place.
For that reason, if you’re going to optimize a number, choose your growth rate. If you charge users, measure revenue’s growth rate. If your product is free, measure active users’ growth rate.
Sidenote: The growth has to be genuine (hence why startups that buy users are just pyramid schemes ready to implode).
During Y Combinator, they measure your growth rate per week. A good growth rate is 5–7% per week. If you hit 10%, you’re doing exceptionally well. Anything lower than that means you haven’t figured things out yet.
“We encourage every startup to measure their progress by weekly growth rate. If you have 100 users, you need to get 10 more next week to grow 10% a week. And while 110 may not seem much better than 100, if you keep growing at 10% a week you’ll be surprised how big the numbers get. After a year you’ll have 14,000 users, and after 2 years you’ll have 2 million.” — Paul Graham
And that’s it for today!
Today, we learned:
- Don’t play house.
- What is a startup.
- Why you shouldn’t start a startup.
- Why you should start a startup.
- Universal startup tips to help you get started.
See you next week (follow the series here to be notified).
Be well.
R
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Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.
