I attended Startup School at Stanford this weekend thought it was really well done. There were 11 (count ‘em) talks of about 20-30 minutes, which was a pretty good format: lots of information, and not much fluff.
Paul Graham’s Mid-Morning Keynote
Sure, it was 10:30am, but Paul Graham’s talk had the feel of a (short) keynote. He spelled out the YCombinator approach to startups: Make Something People Want, and don’t worry too much about making money early on. But this approach makes for a strange equation:
Make Something People Want + Don’t Worry About Making Money = Non-Profit
Of course, as an investor and libertarian, Paul Graham is all about making money. But if you really do make something that people want, you can often find a way to get their money. Think of Craigslist. It’s 99.9% free, and doesn’t seem especially concerned about money, but it is also extremely successful. They basically just made something that people wanted, and the rest fell into place.
So instead of nailing down a business model early on, Paul suggests that you work your way “upwind” of profit. If you’re fighting a sea battle in a frigate, your ultimate goal is to sink your opponent’s ship. But the way to do this is to work yourself into position where you can win, by being upwind of the enemy. In a sense, being in the right position is more important than firing your canons early on. (By the way, I’m a little inexperienced with naval warfare, so if you find yourself in a sea battle, I don’t recommend you rely on this advice.)
How, then, do you put yourself in position to make money? First, Make Something People Want. Second, consider benevolence. After all, if you build something people want, and treat them well, you’re well positioned to capture their money.
Beyond this, Paul gives three reasons why benevolence makes business sense.
- It improves morale: your employees will be happier, and people will be more interested in working for you.
- Being benevolent makes others want to help you.
- It also helps you be decisive. If you’re deciding on a course of action, and you choose whatever is best for your users, you’ve probably made a pretty good decision. Whereas if you’re out to screw people over, your life is a little more complicated. (Think of lying: if you lie a lot, you have to keep track of all the lies you’ve told; but if you tell the truth, you don’t need to worry about that.)
I’ve been thinking a lot about startups and ethics lately – not in the “business ethics” sense of “should I play dirty to win?”, but in the sense of “life isn’t really about making money.” This talk was an interesting call to build something worthwhile first, and to profit later.
Notice that this all depends on funding. If you have no funding or no day job, it probably isn’t a good idea to build something without worrying about the business model. But that’s YCombinator: YC provides the seed round, and often paves the way to Angel or VC money.
David Heinemeier Hansson provides a good counterpoint to this approach.
The secret to successful startups
David Heinemeier Hansson gave a great talk soon after Paul Graham, in which he proposed a different approach to successful startups. The secret, according to David, is the middle term in this common formula.
- Build a great application
- ???
- Profit!
Paul Graham suggests that you overlook #2 early on, and instead worry about #1. While David agrees that #1 is important (and is completely in line with the YCombinator “Make Something People Want” mantra), he suggests that #2 is actually pretty easy:
- Build a great application
- Price
- Profit!
In other words, if you want a successful startup, charge money! Don’t worry about VCs, complicated business models, or winning the $1.6B lottery. Instead, just build something people like and charge for it.
He goes into a little more detail, suggesting that you’re better off selling to businesses than to consumers. Consumers want things for free, but businesses are generally willing to pay for good services. He also provides some helpful math, like: $40/month * 2000 users = $1,000,000/year. In other words, you don’t need a ton of users in order to make good money.
There has been some discussion (blog post and news.yc thread), suggesting that it isn’t that simple. After all, 37signals is a PR machine, as much (or even more) than a software company. When they launched Basecamp, they already had a huge following, which gives them a huge advantage over the rest of us.
This is all true, and it’s true that David oversimplified things. But his point wasn’t that it’s easy to win – in fact, he suggested that you might only have a 1 in 10 chance of winning. His point was that you’re better off taking a 1 in 10 bet at a Basecamp-size success than a 1 in 10,000 success at a YouTube-size success. Even though the next YouTube may make 1,000 times the money of the next Basecamp, the marginal value of the first $1M is much higher than the last $1M. So if you only have one life to live, you’re probably better off aiming for a small success than a take-over-the-world success.
As a corollary – and I thought this was a great point – you’re better off enjoying yourself at a somewhat successful company than spending your life in meetings at a hugely successful company. Would you rather be a modest success and work 4 days a week or be a workaholic and hope that you win the M&A lottery?
Again, it’s not quite that simple. It is hard to build even a modestly successful company, and it doesn’t hurt to aim big. But in principle, I’m down with David. After your basic necessities are met, having more money doesn’t really make you happier. And I’d much rather build software 30 hours a week than sit in meetings 60 hours a week, even if the latter paid better. And though it isn’t easy to build a successful “lifestyle” business (which a terrible term, by the way) if you’re smart and apply yourself, you’ll probably figure it out eventually.
I’ll write about the other talks tomorrow. And if you didn’t attend, the videos are posted at Omnisio.