I like to the tell the story that a poor nerd can go into Fry's (electronics store) and get all the parts to build themselves a pretty decent computer, a rich nerd can go into Fry's and not buy anything. The difference is that the rich nerd could by anything, and that choice freeze them. The poor nerd has a budget and has to work within it, so they have already done the work to maximize their value given their budget. Since the rich nerd has no budget they would have to analyze every possible system they could build out of Fry's parts to have the same confidence in their buying decision as the poor nerd has, and frankly there isn't enough time for that. Stalemate.
In the startup world there is an interesting and dangerous place called the 'self funded' or 'privately funded' startup. Those places have a hard time because there is nobody to call their baby ugly and question their assumptions. If your money isn't asking you questions about your existence then you won't ask yourself those questions.
I interviewed at one such and asked how they expected to make money. "Advertising" they said, their CEO was adamant that they had a unique position with respect to their customers which would allow them to advertise more effectively to them. And I asked "So why would people who are already spending their ad budget with Google advertise with you?" and the answer was "We are bringing new people to the Internet, people who have never advertised on this scale before, we're growing the market." And that was when I thought 'Oh really?' Now you could test that theory, you could survey your users and look at their advertising budgets and you could talk to ad agencies and look to see if they were trying to find new channels. But if you did all of that, it would dispel the illusion that the advertising market was growing, its actually shrinking in terms of total dollars (yes the Internet is disruptive again).
So Markham concludes that 'rich' startups failing because they spend all of their money buying products. The counter being that a 'poor' or 'lean' startup would be forced to husband their cash more carefully and build their own tools. The effect is there, but I believe the conclusion is not. One of the things that the poor startup is being forced to do, is develop a competency in being a company. Its not a state that everyone is familiar with.
Lots of people know how to be employees, but not how to be a company. Initially, those new to startups, aren't thinking so much about how long they have to live (as a company) as how much cool stuff they can do with that fat wad of cash. Perhaps they haven't experienced the pain of trying to raise money while working 12 hr days, or had a product they depend on go bad, mid-development cycle, and scrambled to replace it. There are lots of things like that which can, and do, bite you.
It isn't rich vs poor, its disciplined cash management vs undisciplined cash management. Doesn't matter where you start from if you don't respect the cost of capital you will fail.
The majority of startups fail, period. If you analyze the people who execute successful startups, the amount of money or wealth they have is a non-negative factor -- in most cases having money helps. This is why people who are super successful with startups have many repeats.
And I'm saying that as someone that successfully went head-to-head with a funded start-up targeting the exact same niche.
$30M vs piddly little bits (mostly savings from previous projects). The big guys ended up blowing through the larger part of their investment on fancy offices, very large and expensive servers that they didn't need, lots of employees doing things like human resources, 2 managers per employee that actually did something and so on.
The view I came away with when visiting them in their (admittedly beautiful) offices was that they were living under the impression that their burn rate wasn't something to be worried about because time was on their side and would prove them right. 6 months later the whole thing collapsed and we got the largest boost in growth we'd seen to that point. We'd been profitable since launch and besides the initial outlay the project has always made money (up to and including the present day).
We simply couldn't afford anything else.
I'm pretty sure if they had been poor we'd have been toast, those guys had all the connections that you could dream of and were smack in the middle of the valley, whereas we were working from a dinky little office in IJmuiden, the Netherlands (if you haven't heard of it, it's that hotbed of technology in Europe, two VC's per square kilometer or so ;) ).
I think you are taking the title literally. The OP is making an analogy of being rich - will try to throw money at every problem. If someone is short of money, he will deal with whatever he can get for cheap.
Startups are about creating narratives, not consuming them.
What he seems to miss here is that some of the best businesses produce a consumable product after experiencing a problem first-hand and then deciding to go build a solution. If the narrative is clear from the beginning, then the part where "it actually starts working" will come much sooner.
Remember that only part of the narrative, the end, is known by folks who are in the fix-my-own-pain game. The part about finding the business, the experience of using the service, etc -- all of that is yet to be invented. And the front-end of the business, the marketing/sales/delivery channel, is usually the hardest. Businesses are not simply products. (Although many certainly start from them.)
Having money is helpful for start-ups as it allows them to focus on a problem and solve it. The opposite side of the coin could be that when looking for solutions with lots of money their maybe less efficiency.
For anyone interested, the book "Dreaming in Code" (http://en.wikipedia.org/wiki/Dreaming_in_Code) had this sort of idea as a central thread--one of the main failures of the Chandler project seemed to be that, armed with adequate funding, development lost track of reality and sprawled into some degree of failure.
Contrast with, say, "Masters of Doom" (http://en.wikipedia.org/wiki/Masters_of_Doom) where the early id software team was so pressed for cash that they would "borrow" their employer's workstations during evenings to write their code. That's what I would consider "scrappy".
Even more to the point, and I should add this to the article, there are guys out there who have already spent 10, 20, 30K or more -- and can't even empirically demonstrate making something one person wants. (And I'm sticking to off-the-shelf, low-end products that most of the HN crowd might be tempted by. Let's not even start in on the custom, high-end marketing plans and such. Very painful.)
But they can tell you a lot of stories about how all the stuff they bought is going to help them bring in millions.
[+] [-] ChuckMcM|14 years ago|reply
I like to the tell the story that a poor nerd can go into Fry's (electronics store) and get all the parts to build themselves a pretty decent computer, a rich nerd can go into Fry's and not buy anything. The difference is that the rich nerd could by anything, and that choice freeze them. The poor nerd has a budget and has to work within it, so they have already done the work to maximize their value given their budget. Since the rich nerd has no budget they would have to analyze every possible system they could build out of Fry's parts to have the same confidence in their buying decision as the poor nerd has, and frankly there isn't enough time for that. Stalemate.
In the startup world there is an interesting and dangerous place called the 'self funded' or 'privately funded' startup. Those places have a hard time because there is nobody to call their baby ugly and question their assumptions. If your money isn't asking you questions about your existence then you won't ask yourself those questions.
I interviewed at one such and asked how they expected to make money. "Advertising" they said, their CEO was adamant that they had a unique position with respect to their customers which would allow them to advertise more effectively to them. And I asked "So why would people who are already spending their ad budget with Google advertise with you?" and the answer was "We are bringing new people to the Internet, people who have never advertised on this scale before, we're growing the market." And that was when I thought 'Oh really?' Now you could test that theory, you could survey your users and look at their advertising budgets and you could talk to ad agencies and look to see if they were trying to find new channels. But if you did all of that, it would dispel the illusion that the advertising market was growing, its actually shrinking in terms of total dollars (yes the Internet is disruptive again).
So Markham concludes that 'rich' startups failing because they spend all of their money buying products. The counter being that a 'poor' or 'lean' startup would be forced to husband their cash more carefully and build their own tools. The effect is there, but I believe the conclusion is not. One of the things that the poor startup is being forced to do, is develop a competency in being a company. Its not a state that everyone is familiar with.
Lots of people know how to be employees, but not how to be a company. Initially, those new to startups, aren't thinking so much about how long they have to live (as a company) as how much cool stuff they can do with that fat wad of cash. Perhaps they haven't experienced the pain of trying to raise money while working 12 hr days, or had a product they depend on go bad, mid-development cycle, and scrambled to replace it. There are lots of things like that which can, and do, bite you.
It isn't rich vs poor, its disciplined cash management vs undisciplined cash management. Doesn't matter where you start from if you don't respect the cost of capital you will fail.
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] earle|14 years ago|reply
The majority of startups fail, period. If you analyze the people who execute successful startups, the amount of money or wealth they have is a non-negative factor -- in most cases having money helps. This is why people who are super successful with startups have many repeats.
[+] [-] jacquesm|14 years ago|reply
No, it isn't.
And I'm saying that as someone that successfully went head-to-head with a funded start-up targeting the exact same niche.
$30M vs piddly little bits (mostly savings from previous projects). The big guys ended up blowing through the larger part of their investment on fancy offices, very large and expensive servers that they didn't need, lots of employees doing things like human resources, 2 managers per employee that actually did something and so on.
The view I came away with when visiting them in their (admittedly beautiful) offices was that they were living under the impression that their burn rate wasn't something to be worried about because time was on their side and would prove them right. 6 months later the whole thing collapsed and we got the largest boost in growth we'd seen to that point. We'd been profitable since launch and besides the initial outlay the project has always made money (up to and including the present day).
We simply couldn't afford anything else.
I'm pretty sure if they had been poor we'd have been toast, those guys had all the connections that you could dream of and were smack in the middle of the valley, whereas we were working from a dinky little office in IJmuiden, the Netherlands (if you haven't heard of it, it's that hotbed of technology in Europe, two VC's per square kilometer or so ;) ).
[+] [-] movingahead|14 years ago|reply
[+] [-] rrbrambley|14 years ago|reply
What he seems to miss here is that some of the best businesses produce a consumable product after experiencing a problem first-hand and then deciding to go build a solution. If the narrative is clear from the beginning, then the part where "it actually starts working" will come much sooner.
[+] [-] DanielBMarkham|14 years ago|reply
[+] [-] realschool|14 years ago|reply
[+] [-] angersock|14 years ago|reply
Contrast with, say, "Masters of Doom" (http://en.wikipedia.org/wiki/Masters_of_Doom) where the early id software team was so pressed for cash that they would "borrow" their employer's workstations during evenings to write their code. That's what I would consider "scrappy".
[+] [-] DanielBMarkham|14 years ago|reply
But they can tell you a lot of stories about how all the stuff they bought is going to help them bring in millions.