How To Start a Startup – a summary

This is a summary of Paul Graham’s essays titled “How to start a startup” and “How to get startup ideas“. I am writing this post in order to synthesize the lessons from those essays myself, but also as an introduction to the world of startups for people who haven’t drunk the startup koolaid before.

You need three things to create a successful startup:

  • to start with good people
  • to make something customers actually want
  • to spend as little money as possible.

Startups who fail, fail because they failed at one or more of those things. If you do these 3 things right, your startup will most probably succeed. All of those three things are hard, but doable.

The Idea

You don’t need a brilliant idea to start a startup. Simply offer people better technology than they have now. But what people have now is often so bad that it doesn’t take brilliance to do better.

An idea for a startup, however, is only a beginning. A lot of would-be startup founders think the key to the whole process is the initial idea, and from that point all you have to do is execute. Venture capitalists know better. Another sign of how little the initial idea is worth is the number of startups that change their plan en route.

Ideas for startups are worth something, certainly, but the trouble is, they’re not transferrable. They’re not something you could hand to someone else to execute. Their value is mainly as starting points: as questions for the people who had them to continue thinking about.

The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.

When you start out, you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Create wells.

Live in the future, then build what’s missing.

What matters is not ideas, but the people who have them. Good people can fix bad ideas, but good ideas can’t save bad people.

The People

One of the best tricks to decide who to hire. Can you describe the person as an animal? It means someone who takes their work a little too seriously; someone who does what they do so well that they pass right through professional and cross over into obsessive.

The animal test is easy to apply – just recall the person’s image, and say out loud “So-and-so is an animal”. Either you will laugh, or you will nod your head in agreement.

For programmers – three additional tests:

  1. Is this person genuinely smart?
  2. If yes, then could they actually get things done?
  3. If yes to both of the above, then can you stand to be around them?

Only a few people would fail the last test, because genuinely smart people don’t usually feel pressure to act smart. They are comfortable saying “I don’t know” or “I don’t understand X well enough”.

What Customers Want

How do you figure out what customers want? Watch them.

It’s very dangerous to let anyone fly under you. If you have the cheapest, easiest product, you’ll own the low end. And if you don’t, you’re in the crosshairs of whoever does.

Raising Money

Financially, a startup is like a pass/fail course. The way to get rich 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 trade stock for something that improves your odds, it’s probably a smart move.

For the angel to have someone to make the check out to, you’re going to have to have some kind of company. Merely incorporating yourselves isn’t hard. The problem is, for the company to exist, you have to decide who the founders are, and how much stock they each have. If there are two founders with the same qualifications who are both equally committed to the business, that’s easy. But if you have a number of people who are expected to contribute in varying degrees, arranging the proportions of stock can be hard. And once you’ve done 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 recognizing when you have, though. When everyone feels they’re getting a slightly bad deal, that they’re doing more than they should for the amount of stock they have, the stock is optimally apportioned.

When you set up the company, as well as as apportioning the stock, you should get all the founders to sign something agreeing that everyone’s ideas belong to this company, and that this company is going to be everyone’s only job. You should ask what else they’ve signed. One of the worst things that can happen to a startup is to run into intellectual property problems.

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 talk to them you realize that it’s a seller’s market. Even now there is too much money chasing too few good deals.

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 such advice and connections can come very expensive. And as you go down the 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 few new vocabulary words from reading Wired.

Not Spending It

Once you get an infusion of real money from investors, don’t spend it. In nearly every startup that fails, the proximate cause is running out of money. Usually there is something deeper, but even the proximate cause is something to avoid.

Don’t get big too fast. It could mean getting a lot of customers fast, or getting a lot of employees fast. Either is dangerous.

Getting all of the customers in the market, fast, is overrated in most businesses. Google, e.g. appeared on the scene when the search market seemed mature. Anybody CAN come along and develop a better product, and users will slowly but surely go to the better product.

Make sure the founders do every job in the company- sales and customer support included. There is nothing more valuable to a startup than smart users. Listen to them – they will tell you how to make a winning product.

That’s the key to success as a startup. There is nothing more important than understanding your business. 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.

The other reason to spend money slowly is to encourage a culture of cheapness. For most startups the model should be grad student, not law firm. Aim for cool and cheap, not expensive and impressive. The only reason to hire someone is to do something you’d like to do but can’t.

Should YOU Start A Company?

More people are the right sort of person to start a startup that realize it.

What drives people to start startups is (or should be) looking at existing technology and thinking, don’t these guys realize they should be doing x, y, and z?

The final test may be the most restrictive. Do you actually 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– though in that case it probably won’t take four years.

During this time you’ll do little but work, because when you’re not working, your competitors will be.

The amount of work that bullshit you have to deal with in a startup is NOT more than what you’d endure in an ordinary working life – it just seems like it’s more because it is compressed into a shorter period.